Jeffrey Levine has published an in depth article on the CARES Act on the Kitces Report. The Executive Summary is as follows:
In response to the unfolding COVID-19 global pandemic (as the US this week surpassed China as the country with the most confirmed cases in the world), the US Senate has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion emergency fiscal stimulus package, in order to help ease the effects of the resulting economic damage. While the House has yet to vote on the bill, it is anticipated to be approved and signed into law by President Trump shortly thereafter and includes a wide range of provisions for both loans and outright rebate payments or tax credits aimed at helping individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands.
In the context of financial advisors and the clients they serve, the most notable provision in the bill is the direct payments to taxpayers. Specifically, individuals who had up to $75,000 in adjusted gross income in 2019 will receive a one-time payment of $1,200, while married couples with AGI up to $150,000 will get $2,400. Additionally, taxpayers will receive an additional $500 for each qualified child, while individuals and families with income above their respective thresholds will see their relief payments reduced by $50 for every $1,000 in AGI. Notably, while individuals must have a work-eligible Social Security number (and not be claimed as a dependent), they do not have to have had reportable income in 2019 and can also be eligible for other income-benefit programs as well.
From the retirement planning perspective, notable provisions of the CARES Act include the elimination of the 10% early withdrawal penalty on distributions from retirement accounts for so-called “Coronavirus-Related Distributions” (with the option to spread income taxation over three years, and the ability to recontribute back to those same accounts to make up in the future), the suspension of required minimum distributions (RMDs) in 2020 for a wide variety of retirement account (for both account owners as well as beneficiaries) as well as the ability to return current-year distributions, an increase of $600 per week for unemployment benefits for up to four months as well as an expansion of benefits for those who would otherwise not normally qualify (like self-employed individuals and independent contractors), and the deferral of Federal student loan payments through September 30, 2020.
With respect to small businesses that have been impacted by COVID-19, certain small businesses with up to 500 employees will be able to take out loans (up to $10M depending on payroll costs and other factors), which will be eligible for forgiveness if used to cover payroll and other expenses (like rent and utilities), along with other ‘employee retention’ tax credit opportunities. Other benefits for businesses include a delay in the employer’s portion of Social Security payroll tax until January 1, 2021 (with half of the deferred amounts due at the end of 2021, and the other half due at the end of 2022), and more flexible Net Operating Loss rules to obtain immediate refunds, among others.
Beyond benefits for individuals and businesses, the CARES Act provides for $454 billion in emergency lending, not only to states and municipalities, but to airlines and other businesses critical to US national security, and another $150 billion allocated proportionally to state and local governments to offset amounts used to respond to the pandemic.
Ultimately, the key point is that the CARES Act is a historic emergency relief program for Americans and provides much-needed assistance for those affected by the pandemic and the resulting economic damage. And with changes in tax laws come planning opportunities for clients. However, the CARES Act is not without its caveats. As while relief payments to individuals and families are based on 2019 AGI levels, there will be countless Americans currently experiencing sudden financial hardship and unemployment who are seeing significant declines in income, but sadly, will not qualify for relief checks. Similarly, small business relief provisions – for both clients of financial advisors, and potentially financial advisors in their own businesses – do have very specific requirements to qualify (in an effort to ensure the dollars go where needed most, but inevitably meaning that some that are close to ‘the line’ must engage in planning to actually qualify). At the very least, though, the CARES Act will be a dominant conversation for financial advisors and their clients in the months to come as Americans (and the world) continue to cope with the current COVID-19 crisis.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.