CARES Act Becomes Law: What You Should Know

By March 31, 2020 Insights

CARES Act in the nick of time

cares act

Congress signed into law a bipartisan, $2 trillion economic stimulus bill known as the CARES Act. It is the largest such bill in US history.

The US political arena is perennially partisan—certainly more so in recent years. Happily, in what seemed to be better late than never, party leaders came together to pass the largest economic stimulus bill in US history. Known as the Coronavirus Aid, Relief, and Economic Security Act, or simply the CARES Act, this $2 trillion piece of legislation is aimed at providing relief for individuals and businesses that have been adversely impacted by the coronavirus outbreak.

Our team has fielded client questions related to the CARES Act, so we took a deep dive into the stimulus package. While it provides a fair amount of economic relief in various forms, there are a few items we wanted to highlight for our clients.

Use of retirement funds and 401(k) loans:

The bill waives the 10% penalty for withdrawing up to $100,000 from your IRA for coronavirus-related distributions. The distribution is still subject to income tax, but you can spread the tax payments over three years (2020-2022). You can, however, return the cash to your IRA during the subsequent three-year period to avoid owing the tax pro-rata. And no, you still cannot take a loan against your IRA – the IRS still considers that a “non-qualified distribution”.

With your 401(k) however, taking out a loan against those assets is permissible and in fact, the CARES Act increased the total allowable amount from $50,000 to $100,000. As is the case with IRA withdrawals, the 10% penalty to utilize 401(k) funds is also waived, and you have the subsequent three years to repay the loan to minimize what you owe in income tax.

Suspension of Required Minimum Distributions (RMD):

Investors over the age of 72 have been given a waiver to suspend RMDs through 2020. The benefit is two-fold as it will likely reduce an IRA owner’s need to sell investments at depressed prices in order to fund the distribution, as well as, eliminate the need to pay income tax associated with the distribution.

Charitable deductions:

The legislation contained a couple of changes for 2020 to help promote charitable giving. First, for taxpayers that do not itemize, they can now take an “above-the-line” deduction for up to $300 in charitable donations. Second, the Act increases the deductible amount for an individual taxpayer’s cash contributions to a qualifying public charity from 60% of adjusted gross income to 100%. The increased deduction limits apply to cash contributions only (not appreciated property) and excludes gifts to donor advised funds, private foundations and supporting organizations.

In addition to the aforementioned changes, we wanted to make you are aware that the Treasury and IRS extended the federal income tax filing due date to July 15, 2020. Taxpayers may also defer federal income tax payments due on April 15th to the new July 15th deadline. Many states have also extended the tax filing due date. Please check with your states’ taxing authority for specific information regarding any change to the filing date.

What you should do next:

Disclaimer:

ClearRock Capital does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before taking any action.

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