The CARES Act and Its Implications

Within three months of the passage of SECURE Act—a law intended to provide more opportunities for Americans to save for retirement—the federal government passed another historic piece of legislation that essentially does the opposite.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, a historic $2 trillion dollar emergency fiscal stimulus package and the third piece of major legislation passed since the coronavirus outbreak began.

The CARES Act is sweeping in scope. Here a few of the most important provisions as they pertain to individuals.

• Refundable Income Tax Credit:
  • $1,200 for single filers earning up to $75,000 adjusted gross income (AGI)
  • $2,400 for married filing jointly up to $150,000 AGI
  • $500 child credit for each child under the age of 17
  • Credit reductions of $50 per $1000 over the threshold amounts
  • Credits will be given based on the most recent tax filing (2018 or 2019)

• IRAs and employer-sponsored retirement plans for those impacted by the coronavirus:
  • Elimination of the 10% early withdrawal penalty
  • Up to $100,000 withdrawn from one or a combination of plans
  • No mandatory 20% income tax withholding
  • The income and associated taxes can be spread across three years
  • The distribution can be rolled back into the plans within three years, eliminating the income tax exposure

• Rule changes on loans from employer-sponsored retirement plans:
  • Maximum loan increased from $50,000 to $100,000
  • Payments on loans can be delayed for one year
  • All loan changes should be confirmed with employer

• Individuals can forego Required Minimum Distribution (RMDs) for 2020:
  • Includes RMDs for owners and beneficiaries of inherited retirement plans
  • Those that turned 70 ½ in 2019 and have not taken their 2019 RMD may waive their 2019 RMD
  • Those that turned 70 ½ in 2019 and took their first RMD in 2019 cannot undo that RMD

• The five-year rule for designated beneficiaries (charities, estates and certain trusts) is ignored in 2020:
  • Refers to inherited accounts from decedents who die prior to reaching their required beginning date
  • The five-year rule would begin in 2021

• Federal student loan payments can be deferred until September 30, 2020:
  • Payments will not stop until borrowers request the deferral with their loan servicer
  • Interest is not accrued during deferral period
  • Private loans do not qualify for this provision

• Employers can exclude student loan repayment from compensation up to $5,250, which applies through the end of 2020.

• Cash charitable deductions:
  • The 60% AGI limit is eliminated for cash charitable donations; 100% of AGI can be deducted
    • Does not apply if these cash contributions are made to donor-advised funds
• Charitable Deductions:
  • A $300 above-the-line deduction for cash contributions made in 2020
  • This provision may not sunset unless amended

• Over-the-counter medications now qualify as medical expenses.

• Health savings accounts (HSAs) and flexible spending accounts (FSAs) can be used for over-the-counter medications.

If you have any questions about the CARES Act or its implications for your clients, please contact Advanced Planning at advancedplanning@highland.com.