Today, the U.S. House of Representatives passed, and the President signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act is designed to boost the economy by providing over $2 trillion in relief, ranging from individual rebates to increased unemployment benefits to tax breaks. Here are some highlights of the CARES Act (the “Act”), with more detail to follow.
Recovery Rebates for Individuals
The Act provides for payments of $1,200 for singles and heads of households ($2,400 for married couples filing joint returns), and a $500 payment per qualifying child dependent under age 17. The rebates phase out at a 5% rate above the following adjusted gross income (AGI) levels: $75,000 (single)/$112,500 (head of household)/$150,000 (joint). Eligibility will be determined based upon 2019 (if filed) or 2018 tax returns, or in the absence of a return being filed, the Social Security Benefit Statement (Form SSA-1099). The payments will not be counted as taxable income because the rebate is a credit against tax liability. An individual who is claimed as a dependent on another individual’s tax return is not eligible for the payment.
Special Rules Regarding Retirement Funds
- Required Minimum Distributions (RMDs): RMDs are waived for 2020. The waiver includes RMDs that must be taken by April 1, 2020 due to the account owner turning 70 ½ in 2019. The recently passed SECURE Act raised the age that individuals must begin taking distributions from 70 ½ to 72, but this change does not apply to individuals who turned 70 ½ in 2019. Distributions from inherited IRAs are also waived for 2020.
- Hardship Distributions from IRAs and 401(k)s: People affected by the coronavirus can access up to $100,000 of their retirement savings without being subject to the 10% penalty that normally applies to distributions taken before age 59 ½. These so-called hardship withdrawals are taxable to the account owner, but the tax can be paid over three years, rather than in the first year. Alternatively, the owner can repay the distribution to the retirement plan within three years and avoid having to pay tax. To qualify for a hardship withdrawal, the account owner or his or her spouse or dependent must have been diagnosed with the coronavirus or lost income due to a business closure, layoff, quarantine, reduction in hours or inability to work due to lack of childcare.
- Loans from 401(k) Plans: Participants in 401(k) or similar plans who have been diagnosed with the coronavirus or affected by economic losses related to the virus can take a loan from the plan over the next six months up to the lower of $100,000 or 10% of the account balance. This is an increase of the existing $50,000 loan limit. Individuals with existing 401(k) loans can delay repaying any loans due in 2020 for one year.
Changes to Charitable Contributions
The Act added an above-the-line deduction of up to $300 for charitable contributions made in cash by individuals who do not itemize deductions, in addition to the standard deduction. This provision is applicable for the tax year 2020 and beyond.
For individual taxpayers that itemize deductions, cash contributions made during 2020 will not be subject to AGI limitations. Prior to tax year 2020, an individual’s charitable contributions made in cash were limited to 60% of their AGI.
For corporate taxpayers, charitable contributions will be limited to 25% of taxable income, as opposed to the current 10% limitation.
Please contact any member of your Pennsylvania Trust team if you have any questions about the CARES Act, or other recent coronavirus-related legislation and how it might impact you.
Francis X. Mehaffey is Senior Vice President and Director of Tax Services for Pennsylvania Trust.
Contributing author: Leslie Gillin Bohner, Esq., Executive Vice President, Chief Fiduciary Officer and General Counsel of Pennsylvania Trust.