Last week, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. Because of the economic damage inflicted by the coronavirus through social distancing and shelter-in-place orders, a recession is inevitable. However, there is light at the end of the tunnel, as the President has expressed optimism that the economy would be on its way to recovery by June.
The CARES Act is designed to provide much-needed relief to keep the economy afloat. Namely, there are benefits to small businesses, large corporations, state and local governments, and individuals.
This is designed to provide a general outline of the provisions affecting individuals and small businesses. Since this is brand new, some details aren’t clear, and practical next steps may be forthcoming.
Benefits for Individuals
Cash payments: perhaps the most well-known provision is cash payments directly to individuals. An individual would get $1,200 while a married couple would get $2,400. In addition, additional $500 per child would be paid. A family of four would receive $3,400.
However, eligibility is based on adjusted gross income (either your 2018 or 2019 taxes). For single tax filers, the amount is reduced starting at $75,000 (phased out completely above $99,000) while married joint filers will see a reduction starting at $150,000 (phased out above $198,000).
To calculate how much you’ll get, click here!
Student loans deferred until September 30, 2020: while you can still make voluntary payments, required payments will be deferred without interest accruing. Since most borrowers’ payments are automatic, check with your loan servicer to make adjustments.
Furthermore, if you are in a loan forgiveness program (i.e. Public Service Loan Forgiveness program), these next 6 months will still count towards your loan forgiveness!
It’s important to note that this relief only applies to Federal Direct loans, not private loans.
Expanded unemployment benefits: the national average weekly unemployment benefit is $340. The CARES Act gives states the ability to increase unemployment benefits by $600 per week for up to four months. Other provisions include:
- Removing the one-week “waiting period” to receive benefits
- Extending the time period one can receive unemployment benefits by 13 weeks
- Including workers not eligible for unemployment benefits (i.e. self-employed, contractors) in a new “Pandemic Unemployment Assistance” program
Increased flexibility for retirement account withdrawals: our retirement accounts are normally our last place we want to make withdrawals from, as income taxes and early withdrawal penalties make these unattractive vehicles for accessing funds. But in desperate times, the CARES Act makes the following modifications for “coronavirus-related distributions”:
- No 10% early withdrawal penalty for people under the age of 59 ½.
- The ability to spread the income over the next three years for tax purposes.
- The option to “repay” or “rollover” the distribution back into the retirement account over the next three years (rather than the normal 60-day window). By doing this, you can amend your tax returns to claim a refund of any taxes paid on the withdrawal(s).
- No mandatory 20% withholding for taxes on withdrawals from an employer-sponsored retirement plan (i.e. 401k).
Not only are withdrawals given more favorable treatments, but loans from an employer-sponsored plan are enhanced:
- The maximum loan amount increases to $100,000 (up from $50,000).
- You can use up to 100% of your vested account balance (up from 50%).
- Date of payment delayed by up to one year.
Lastly, required minimum distributions (RMD’s) for those over 70 and beneficiaries of IRA’s have been waived for 2020.
Medicare beneficiaries: those on Medicare will be able to get a COVID vaccine for free (when available). In addition, a Medicare beneficiary with Part D must be able to get a 90-day supply of medication filled.
Charitable contribution limits increased: for 2020, the limit for charitable contributions increases from 60% of adjusted gross income to 100% of adjusted gross income. Essentially, an individual with charitable aspirations can have no tax liability by donating 100% of his/her adjusted gross income through qualified charitable contributions (does not include donor-advised funds).
Tax filing deadline extended to July 15: in addition, you also have until July 15 to make your IRA contributions for 2019.
Benefits for Small Businesses
Paycheck Protection Program: of concern during this time is the effect on small businesses, since social distancing or outright closures can mean layoffs or permanent closures. The cornerstone provision of The CARES Act for small businesses is the Paycheck Protection Program:
- Gives businesses with less than 500 employees access to loans through the Small Business Administration
- Loan amounts up to 2.5 times the average monthly payroll costs or $10 million, whichever is less
- Favorable loan terms (maximum interest of 4%)
- Ability for part or all of the loan to be forgiven!
With respect to loan forgiveness, any amount used for things like payroll, rent and mortgage can be forgiven as long as the company keeps employees on payroll through June.
Employee Retention Credit: besides the Paycheck Protection Program, The Employee Retention Credit provides a payroll tax credit for companies that have had operations closed or suspended by the government or have seen revenues drop by 50% from the same quarter in 2019.
Payroll Tax Relief: while talk of a “payroll tax holiday” was floated early on in the crisis, the final law instead provides some payroll tax relief:
- Companies can defer 50% of payroll taxes due from the date of enactment through the end of the year.
- Half of this deferred tax will be due on December 31, 2021.
- The remaining half is due on December 31, 2022.
We know these times are difficult for many reasons, but we hope this explanation of the CARES Act helps clarify some of the relief that is coming.