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CARES Act and Potential Planning Opportunities


Over the course of the past week, we have begun to see some slivers of light, both in terms of the impact that social distancing is having on the spread of COVID-19, and what might be the beginning of a market recovery.   Only two weeks ago today, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump.  This Communiqué will focus on the provisions of the CARES Act that impact many of our clients.  In our experience, if a document is over two pages most readers will quit reading.  So, rather than review the new law and then explain planning opportunities, we are doing this backwards—first, the planning recommendations and then the explanation of the pending new law provisions.  

A timeline for some perspective on how quickly things have changed

Past performance may not be indicative of future results.  Indexes are not available for direct investment

Planning opportunities as a result of the CARES Act

Free Money!

Well, free isn’t exactly true.  Under the CARES Act you may qualify for the $1,200 per person, $2,400 per couple (as well as an additional $500 per child under 17) “Recovery Rebate Payment” if your income is under certain limits (details later in this Communiqué).  These rebates are advances against a refundable tax credit for your 2020 taxes based upon 2020 income.  However, because neither you nor the government knows what your 2020 income is going to be, the Recovery Rebate Payments you have been hearing about are being distributed based upon your 2018 or 2019 income, and you can settle up with Uncle Sam when you file your 2020 return in April 2021.  

Planning tip  Your Recovery Rebate Payment is based upon either your 2018 or 2019 income tax return (whichever is the latest return that the IRS has on file), so if your 2019 income is less than it was in 2018, AND, if your income is under the threshold (or under the fully phased-out limit) for your filing status, get your 2019 return filed immediately.

No Required Minimum Distributions (RMD) from your IRA, 401(k), 403(b) or 457(b) plan for 2020

The CARES Act has suspended the requirement that individuals over the age of 70-1/2 take their Required Minimum Distribution (RMD) in 2020 (details later in this Communiqué).

Planning tip  If you can manage your expenses without taking your RMD for 2020 (or, perhaps taking a reduced amount if necessary to cover expenses) you can reduce your 2020 taxable income and perhaps, depending upon your particular circumstances, move to a lower tax bracket.

Have you taken a distribution within the last 60 days that you don’t need?  If so, you can “pay that back” to your retirement account and avoid the income.   You can even return distributions you might have taken in January or February that are beyond the 60-day window if you meet certain other guidelines.  If you have taken distributions and you don’t really need the money, call us and we can guide you through your available options.


For the most charitably minded of our clients, limitations on contributions for 2020 have been raised to 100% of income

The CARES Act has temporarily increased the limit on charitable contributions from 60% of AGI (adjusted gross income) to 100% of AGI for 2020 (details later in this Communiqué).  

Planning tip You can totally wipe out your 2020 tax liability with charitable contributions so if you are willing to give all of this year’s income to charity it can be done.   In 2021, the charitable contribution limit returns to 60% of Adjusted Gross Income (AGI). 

Student Loan Payments Deferred Until September 30, 2020

Required payments on Federal student loans are deferred until September 30, 2020.  During this time, no interest will accrue on your debt (details later in this Communiqué). 

Planning tip If you intend to qualify for a program that will ultimately forgive the entirety of your Federal student debt (such as the Public Service Loan Forgiveness program) immediately stop making loan payments.  You are effectively paying down what is 0% debt.

For those who do (eventually) have to pay-off student debt, do not stop making your payments.  During the next 6 months, all of your monthly payments will be applied to principal reduction, which could dramatically reduce the amount of your debt and how long it is going to take you to pay it off.


For a more in-depth explanation of the CARES Act, read on….

Recovery Rebates

The Recovery Rebates for Individuals have received much interest from the general public and attention from the various news agencies.   People want to know whether they qualify for these payments, how much they will be, how the amounts are calculated, and when will they get the money.  What we don’t know is when, but what we hear is that it will be very soon.   The questions about qualification and how much we can answer.

First, as noted earlier, this is a refundable tax credit against 2020 income taxes, although the advance payment amount is based upon either the 2018 or 2019 income—depending upon which year is the most recent the government has on file.  The maximum amount of the credit is $1,200 for a single taxpayer or $2,400 for a married couple filing a joint return, with an additional $500 for each child under the age of 17.  However, the amount of the credit will phase out once the taxpayer’s income reaches a certain threshold.  For those filing as “married filing a joint return,” the threshold is $150,000.  For a “head of household” filing status, the threshold is $112,500.  For all other taxpayers, the threshold is $75,000.  For every $100 of income over the threshold amount, the credit will be reduced by $5.  Here are a couple of examples on how this works:

Example #1: The Smiths, a married couple, have two children under the age of 17.  The maximum Recovery Rebate for this couple is $3,400 ($2,400 + $500 + $500).  In 2019, the most recent year their return is on file with the IRS, they had adjusted gross income of $175,000.  This is $25,000 over the threshold of $150,000 so their credit is reduced $5 for every $100 over the threshold or $1,250 ($175,000 - $150,000 = $25,000 x 5%) resulting in a net Recovery Rebate check of $2,150.  But there is even more.  Remember this is an advance rebate check based upon a refundable 2020 tax credit.   In our example, the Smiths are travel agents, who in 2020 ultimately will only earn $90,000 (well below the threshold for a married couple of $150,000).  When they file their 2020 return the actual amount of the credit will be $3,400, so the difference between that amount and the Recovery Rebate check they received for $2,150 ($1,250) will be an additional refundable credit they will get next year.  

Example #2: The Joneses are a married couple with 4 children under age 17, so their maximum rebate is $4,400.  For 2019, the most recent year for which they have filed a return their combined income was $130,000.  That is below the threshold amount of $150,000, so they will get a Recovery Rebate check of $4,400.  However, Mr. Jones is toilet paper distributor.  In 2020, due to large toilet paper demand, he has his best year ever and earns $240,000 for the year.  Their household income is now $90,000 above the threshold for the credit, but they get to keep the Recovery Rebate check they received based upon the prior year tax return.  No repayment is required!


Changes to Retirement Plan Rules

Coronavirus-Related Distributions – Under the old rules, a distribution from a qualified retirement plan (IRA, 401(k), 403(b) or 457(b)) for individuals under age 59-1/2 was subject to a 10% penalty (plus income taxes) unless certain exceptions were met.  The CARES Act creates Coronavirus-Related Distribution provisions that provide that the 10% penalty will not apply on distributions of up to $100,000 in 2020 if made to an individual:

  • Who is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC
  • Whose spouse or dependent is diagnosed with the virus; or
  • Who experiences adverse financial consequences because of being quarantined, furloughed, laid off work, or having hours reduced due to COVID-19; being unable to work because of lack of childcare; or closing one’s own business.

The distribution amount (not to exceed $100,000) will still be subject to income taxes, but the liability is spread over 3 years starting in 2020, unless the taxpayer elects otherwise.  In addition, these Coronavirus-Related Distributions are not subject to the otherwise mandatory Federal withholding of at least 20%.  Finally, these Coronavirus-Related Distributions can be repaid (rolled back into a retirement account) over 3 years beginning on the day after the distribution.  Any tax paid on the distribution can be recovered by filing amended returns.

Plan Loans – Under the old rules, once a plan participant had a vested plan balance of $20,000, they could take a loan up to the lesser of 50% of their vested balance or $50,000.  Under the CARES Act, there is a temporary increase in the maximum loan amount to $100,000.  The Act also allows the participant to borrow up to the lesser of $10,000 or 100% of their vested account balance.  Any existing plan loans that came due between the enactment of the CARES Act and December 31, 2020 are pushed back one year.

Required Minimum Distributions are Waived in 2020 – The CARES Act suspends all Required Minimum Distributions (RMDs) for 2020.  This provision applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and Governmental 457(b) plans.  In addition, the ability to suspend distributions for 2020 applies not only to the retirement account owner but also to any beneficiaries of a deceased account owner taking “stretch distributions.”

In a surprising twist, the Act not only eliminates RMDs for 2020 but any RMD that otherwise needed to have been taken in 2020.  In other words, individuals that turned 70-1/2 in 2019 but elected to take their first distribution in 2020 no longer have to take that “delayed” 2019 distribution.  

The suspension of RMDs does not impact voluntary distributions, including Qualified Charitable Distributions (QCDs), for IRA owners and beneficiaries age 70-1/2 or older.   Although there is no RMD to offset, these QCDs still allow you to use entirely tax-free dollars to make your charitable contributions.

Returning Unwanted 2020 RMDs – A number of individuals have already taken their 2020 RMDs either in full or, for many clients, 3 months of distributions based upon what we thought was going to be the RMD for 2020.  For those who do not need the distributions and want to reduce their taxable income for 2020, these distributions can be repaid.  This is possible in one of two ways:  for distributions that have taken place within the last 60 days, you can elect the once-per-year rollover and simple “repay” the funds to your IRA account by writing a check and depositing it.  For those who took a distribution more than 60 days ago, there is another potential approach.  If it can be shown that the individual has been impacted by the COVID-19 crisis enough to qualify under the liberal guidelines outlined earlier for Coronavirus-Related Distributions, then the rollover can still be completed because under those guidelines you have 3 years from the date of the distribution.

Please Note:  The ability to “repay” distributions taken earlier this year only applies to account owners; it does not apply to beneficiaries of a deceased account owner.


Charitable Contributions

The Act added a new “above the-line” deduction for charitable contributions.  What this means is that even taxpayers who currently use the Standard Deduction can take an additional deduction off of their adjusted gross income for charitable contributions.  That is the good news. The not-so-good news is that the maximum deduction is limited to $300, so for a taxpayer in the highest bracket of 37%, that amounts to a tax savings of $111.  And, for a taxpayer in the 22% bracket, the savings drop to $66.  For those in the second-lowest bracket of 12%, the savings will buy you a pizza and a couple of beers.

For the most charitably minded individuals, the CARES Act temporarily increases the limit on charitable contributions from 60% of AGI to a maximum of 100% of AGI, so you can effectively give all of your income to a charity in 2020 and wipe out all income tax.


Relief for Student Loan Borrowers

Student Loan Payments Deferred – The Act suspends required payments on Federal student loans through September 30, 2020.   During this time, no interest will accrue on the debt.  It is important to note that because voluntary payments are allowed, automatically scheduled monthly payments will continue unless individuals take proactive measures to contact their loan provider and pause payments.  

For individuals intending to qualify for a program that will ultimately forgive the entire student debt, even though payments are temporarily suspended, the time period (now through September 30) will be counted towards the loan forgiveness program.

Involuntary debt collection actions are also suspended through September 30, 2020.  This includes wage garnishments, the reduction of other Federal benefits, and the reduction of tax refunds.  Borrowers who are delinquent on student debt payments and would normally be subject to a reduction of their tax refund have an incentive to file their tax returns in time so that the refund is processed before the September 30 date.


Medical Related Provisions

For those individuals with Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Healthcare Flexible Spending Accounts (FSAs), the definition of qualified medical expenses is expanded to include over-the-counter medications.

The CARES Act also contains personal healthcare provisions including:

  • Medicare beneficiaries will be eligible to receive the COVID-19 vaccine (when available) at no cost.
  • During the COVID-19 emergency period, Medicare Part D recipients must be given the ability to have, upon request, up to a 90-day supply of prescribed medications.


The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes many other provisions which we chose not to cover in this already long Communiqué.  Some of the other provisions of the Act include:

  • Pandemic Unemployment Assistance for self-employed individuals;
  • the “bump” in unemployment compensation of $600 per week for up to 4 months;
  • a 13-week extension in the maximum number of weeks for state-covered unemployment benefits;
  • the Paycheck Protection Program, which is a loan program offered through the Small Business Administration (SBA);
  • employee retention payroll tax credits; and
  • deferral of payment of payroll taxes for certain employers.

Stay safe and stay healthy!

For information purposes only. Opinions expressed herein are solely those of Droms Strauss Wealth Management, unless otherwise specifically cited.  Material presented is believed to be from reliable sources, but no representations are made by our firm as to another parties' informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Past performance may not be indicative of future results. Indexes are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.