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Unwrapping the CARES Act

Taxes Managing Your Finances

The CARES Act became law late Friday afternoon Eastern time. And while things will still get refined, I thought I'd give you a first look at it based off some CE I took on Friday from Kitces.com. So...here we go.


The baseline rebate is 1,200 per individual (think adult) and $2,400 for married couples. You will get an additional $500 for children under age 17. You get nothing for Junior who is home from college eating you out of house and home. I suspect there will be no rebate for dependents between 18 and 24.

You will get the full rebate if your Adjusted Gross Income (AGI) is below the following thresholds. $150,000 for Married Filing Jointly (MFJ); $112,500 for Head of Household (HoH) and $75,000 for all other filers (primarily single).

The phase out is $5 per $100 of additional income. So, unlike other phase outs that have a range, this one will depend on how much income you receive. A MFJ couple will phase out faster than a MFJ couple with two kids. Pretty uncommon in the tax code.

The rebate is technically based on your 2020 income which the government doesn't know yet. So, they'll use your 2019 return if it is available or the 2018 return is it isn't. If you haven't filed either one, they'll use your Social Security records for those years. A couple of points to ponder on this one.

  •  A Taxpayer who had high income in 2018 or 2019 and loses his or her job in 2020 won't get any rebate until filing a 2020 return.
  • If you know that your 2019 income will put you into the phase out range and your 2018 income is lower, hold off on filing your return. If the opposite is true, hurry up and file, because...
  • As of now, there is no "claw back" if you get a larger refund than your actual 2020 income would allow you to get.

A couple of other things to keep in mind. The money will be Direct Deposited into the account you've designated for refund on your last return. Apparently, they won't make a deposit to an account you used to pay your taxes. For seniors, the deposit will go to where their Social Security check is deposited. If you don't have a deposit account on record, they'll send a check to your last known address. The instructor in the class I was in said he thought the funds probably wouldn't show up until May. And since this is a tax rebate, it isn't taxable income. 

Retirement Accounts

The CARES act temporarily suspends the penalty for early withdrawals from retirement accounts. You can take out up to $100,000 form a combination of IRAs and employer plans. You have to take the funds out in 2020 and the reason to take the funds out has to be COVID-19 related. With that said, the definition of COVID-19 related is pretty broad.

Additionally, the mandatory 20% withholding is waived and you can spread the tax payment over 3 years and you have up to 3 years to redeposit the money and avoid taxation. Still waiting guidance on how those two interact.

Loans from employer plan maximums have been increased to $100,000 or 100% of Vested balance (whichever is less) and you can delay payments on other loans from employer plans for a year.

RMDs from all retirement accounts are waived in 2020. This includes inherited IRAs as well. If you've already taken an RMD and the account is not an inherited IRA, there may be a way to get it back in, but details to follow. This rule does not eliminate the option to use Qualified Charitable Distributions (QCD) and the distribution in 2021 will be based on a year passing (i.e. a bigger percentage)

Unemployment Compensation

For the first time that I'm aware of self-employed individuals will be eligible for a form of unemployment compensation. The program is called Pandemic Unemployment Assistance will be available for up to 39 weeks. I haven't seen the formula for the calculation of benefits yet.

For employees, unemployment insurance will start immediately (normally a one-week delay). The federal government will pay $600 per week on top of state unemployment compensation This benefit will last for up to 4 months (technically, the states have to ask for the assistance, but I'm pretty sure they will).

Maximum time on state unemployment is increased by 13 weeks.

Self-Employed Considerations

First quarter estimated tax payments are not due until July 15th. Second Quarter estimated taxes are still due on June 15th. You're actually not required to make a payment each quarter, but you should line your payments up with your income. And the IRS, doesn't mind if you pay early (if you wait until the end of the year to pay all of it, you'll get penalized). So...at least in theory, you could combine your first and second quarter payments and pay them all in the first quarter...on July 15th. IRS may come out with some further guidance, but at least this is theoretically possible.

You can also delay paying ½ of your self-employment taxes. Taxes accrued starting on Friday through the end of 2020 can be delayed with 50% (of the ½) due December 31, 2021 and the other half due on December 31, 2022.

Business Owner Considerations

Like self-employed individuals, businesses can delay paying the employer portion of payroll taxes.

Additionally, there are loans from the government that can be taken and if used for approved uses, the loans can be forgiven.

There are also incentives for employers to keep employees on the payroll.

If you'd like to chat more about Business Owner benefits feel free to contact me.

A Couple of Other Things

For 2020 you can make a cash donation of up to $300 and deduct it above the line, which means you don't have to itemize to do it. So, if you don't itemize and don't keep track of charitable contributions, you might want to do it this year. If you do itemize, this benefit isn't available to you.

The AGI limits for charitable contributions are eliminated. So, if you want to make a really big charitable contribution, this is the year to do it.

Interest and payments on Federal Student loans are waived until September 30th. But if you have automatic payments set up, you'll need to turn them off. Financially, stopping payments is the better option as you could earn a little interest on the payments while deferring them. But, if you're in a hurry to pay off your student loans, your normal payment will go 100% towards principal.

That pretty well wraps up what I know so far. I'm sure things will change and we'll continue to monitor and do our best to keep you informed.

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