Contributed by: Kali Hassinger, CFP®
As more states implement quarantine tactics, lawmakers in Washington struck a compromise on a major fiscal stimulus package to help combat the effects of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 packs in a lot, with upwards of $2 trillion slated to provide critical support for the economy. In comparison, the American Recovery and Reinvestment Act of 2009 was $831 billion.
While we don't know the short or long term effects of this pandemic on the economy, the combination of monetary and fiscal stimulus efforts will hopefully serve as a bridge until regular economic activity can continue. Even with the largest spike in single-week unemployment claims ever, the optimism surrounding this stimulus helped the S&P 500 post its largest three-day rally (+17.6%) since April 1933.
Lawmakers put together this bipartisan package much more quickly than initially anticipated with crucial provisions to expand unemployment eligibility and benefits, small business relief, and even direct financial support to some US citizens. Here's what we know so far:
Checks Are Coming
Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government now!
Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:
Married Filing Jointly: $150,000
Head of Household: $112,500
All other Filers: $75,000
The rebates are dispersed based on your 2018 or 2019 income (whichever is the most recent return the government has on file) but are actually for 2020. This means that if your income in 2018 or 2019 phases you out of eligibility, but your 2020 income is lower and puts you below the phase-out (for example, lose your job in 2020, which many are experiencing), you won't receive the rebate payment until filing your 2020 taxes in 2021! The good news is that those who do receive a rebate payment based on 2018 or 2019 income and, when filing 2020 taxes, find that their income exceeds the AGI thresholds, taxpayers won't be required to repay the benefit.
How much can I expect to receive?
Married Filing Jointly: $2,400
All other Filers: $1,200
An additional credit of up to $500 for each child under the age of 17
If income is above the AGI limits shown above, the credit received will be reduced by $5 for each $100 of additional income.
When will I receive my benefit? The Timeline isn't clear at this point. The CARES Act mandates that these payments be processed as soon as possible, but that term doesn't provide a firm deadline.
Where will my money be sent? The CARES Act authorizes payments to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have their payment sent to the last known address on file.
Retirement Account Changes
Required Minimum Distributions are waived in 2020
Distributions due to COVID-19 Financial Hardship – Distributions up to $100,000 from IRAs and employer-sponsored retirement plans that are due to COVID-19 related financial hardships will receive special tax treatment. There will be no 10% penalty for individuals under the age of 59 ½ and the usual mandatory 20% Federal tax withholding will be waived. Income, and therefore the taxes due from these distributions, can be spread over three tax years (2020, 2021, and 2022), and there is even the option to roll (or repay) distributions back into the retirement account(s) over the next three years.
Loans from Employer-sponsored Retirement Plans – The maximum Loan amount was increased from $50,000 to $100,000 and allows account holders to borrow from 100% of their vested balance. Repayment of these loans can be delayed one year.
Charitable Giving Tax Benefits
The CARES Act reinstates a possible above-the-line tax deduction for charitable donations up to $300. This deduction is only available for taxpayers who do not itemize.
For those who do itemize, the charitable deduction limit on cash gifted to charities is increased from 60% of Adjusted Gross Income to 100% of Adjusted Gross Income for 2020. If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years. This does not apply to Donor Advised Fund contributions.
Student Loan Repayments
Student loan payments are deferred, and loans will not accrue interest until the end of September. Although the interest freeze will occur automatically, borrowers will have to contact their loan servicers and elect to stop payments during this period.
Expanded Unemployment Benefits
Unlimited funding for Temporary Federal Pandemic Unemployment Compensation to provide workers laid off due to COVID-19 an additional $600 a week, on top of state benefits, for up to four months. This includes relief for self-employed individuals, furloughed employees, and gig workers who have lost contracts during the pandemic.
Small Businesses Support
In the form of more than $350 billion, the CARES Act offers forgivable loans to help keep the business afloat, a paycheck protection plan, grants, and the ability to defer payment of payroll tax, to name a few.
Individual Healthcare
HSAs and FSAs will now enable the purchase of over the counter medications as qualified medical expenses. Medicare Part D participants must be allowed to request a 90 day supply of prescription medication, and if/when a COVID-19 vaccine becomes available, it must be free to those on Medicare.
Additional Healthcare Support
$150 billion is allocated to hospitals and community health centers to provide treatment and equipment to fight coronavirus.
Education Funding
$30 billion will be allocated to bolster state education and school funding.
State And Local Government Funding
$150+ billion will be allocated to "state stabilization funds" to support reduced state and local tax receipts.
Other Provisions
The CARES Act provides an additional $500 billion buffer for impacted and distressed industries, including the airlines, mass transit, and the postal service.
Depending on the length and impact this pandemic, lawmakers are already talking about another round of intervention in a phased approach.
Life may feel a little chaotic these days, but we hope you take comfort in knowing your financial plan was tailored to your risk tolerance, ability to handle market volatility, and overall financial goals. As always, we are here to answer your questions.
Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.