Coronavirus Stimulus Plan (CARES Act)
Updated: Aug 4, 2020
The largest-ever economic stimulus package was approved and signed off on this past Friday, March 27th. This is a massive financial injection into the economy with the goal of helping individuals, small businesses, and industries affected most by COVID-19. This $2 trillion package has dozens of different components, most of which will not be covered in this article. This article is intended to provide a summary of what parts of the stimulus might affect the average American the most. As more information and details become available, this article will be updated. Most Americans will benefit from this bill through direct payment checks, 2020 Required Minimum Distributions changes, unemployment benefits, retirement accounts, mortgage payments, and student loan payments.
Direct payments to households: This payment is the centerpiece of the bill, providing checks to be sent directly to individuals and families. Each qualifying individual would receive $1,200 plus an additional $500 per child (under the age of 17 if claimed as a dependent). Qualifying individuals must have a Social Security number, be over 17 years old, not claimed as a dependent, and meet income restrictions. For example, a married couple with two children in 2019 would receive a check of $3,400 ($1,200 per adult and $500 for each child).
The $1,200 payment is reduced for individuals making over $75,000 of income annually and $150,000 for married couples. Individuals with over $99,000 of income or couples with over $199,000 will be completely phased out and receive nothing. The income limit described is based on adjusted gross income (AGI) and can be found on your 2019 1040 tax return on line 8b or on line 7 of your 2018 tax return. AGI takes your gross income and deducts some items such as retirement and HSA contributions, student loan interest deduction, etc. To calculate your adjusted gross income, the government will use your 2019 tax return or 2018 if 2019 is not yet filed.
The IRS could start issuing payments within three weeks that would either arrive via check or electronically through direct deposit if your information is already established through previous tax returns. To avoid delay or inaccurate payment, make sure your address or bank account has not changed since receiving your most recent tax return as that is where the check or direct deposit will be sent.
It is estimated that over 165 million people or 93% of all Americans will get some benefit. This check is not expected to be paid back and will not be counted as taxable income on your 2020 taxes.
Required Minimum Distributions: Required Minimum Distributions (RMDs) are being suspended for 2020. As of now, this is a true suspension, not a postponement, and will never have to be taken. This allows retirement account balances to have more time to recoup any losses they may have incurred rather than being sold and distributed.
Unemployment benefits: a historic expansion of unemployment insurance would see unemployed workers receive an extra $600 for four weeks. The bill also has a pandemic unemployment program to add individuals who are unemployed, partially unemployed, or unable to work because of the virus and don’t qualify for traditional benefits. The biggest benefactors of this would be independent contractors and those in the “gig economy” who aren’t able to qualify for traditional benefits.
Retirement: Those needing cash immediately can benefit from these two temporary changes within retirement accounts.
401k participants can now take a loan in the amount of $100,000 (up from $50,000) or 100% of the balance, whichever is less. Those who are currently making 401k loan repayments can delay those payments for 2020.
The IRA is lifting the 10% early withdrawal penalty for IRA and 401k distributions relating to being diagnosed with the virus, having lost income due to layoffs, business closure, inability to work due to lack of child care, quarantine, or reduction of hours. Tax payments on distributions can be paid over a three year period or if the distributed amount is put back, in full, into the retirement account within three years, no tax will be due.
Mortgage payments: The bill allows borrowers with federally backed mortgages to request mortgage payments be postponed for 180 days. Borrowers must have a financial hardship that is directly or indirectly related to the virus pandemic. Payments will not be forgiven but most likely added on the back end of the loan’s duration.
Student loans: This bill allows most Americans with federal student loans to suspend their monthly payments through the end of September (six months) without accruing any interest. This will take effect automatically without any effort on the part of the borrower. For those looking to qualify for public service student loan forgiveness, the suspended six months will still count towards your 120 months. This bill does nothing for individual borrowers with private student loans.
Again, this is just a portion of the full bill with many more individual, corporate, and state and local government benefits. This article will be continuously updated as more details come out, and as always, please consult your tax advisor before acting on any of the tax-related items included.
Please feel free to email or call me with any other concerns or questions,
Evan Werckenthien, CFP
Wall Street Journal
The Washington Post
Kyle Pomerleau, fellow at the American Enterprise Institute
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