Accretive On: CARES Act

March 31, 2020

March of 2020 will be a month that we will never forget, as the novel Coronavirus (COVID-19) becomes the first pandemic to hit the world since the Spanish flu of 1918. The growth of city and state-wide “shutdowns”, along with various work-from-home or shelter-in-place mandates has created a drastic reduction in consumer demand. Beyond the shock to demand, of course, has been the largest waive of lay-offs and furloughs the US economy has ever seen. Just last week, we saw single-week unemployment claims grow to 3.3. million. In an attempt to reduce the economic impact that the coronavirus is undoubtedly going to have, the US Senate passed the CARES Act, which President Trump signed into law on Friday, March 27th. (We wrote about the Coronavirus back in late February, and as a follow-up, we hosted a webinar and conference call with live Q&A in late March. If you would like a copy of the recording, please contact us  

As is the case with most US government legislation, there are several provisions, with several sub-parts across all 880 pages of the CARES Act. We will focus on what we believe to be the most relative and key provisions for our clients and readers.  

2020 Recovery Rebates for Individuals

The most prominent element of the Act that will impact most Americans is undoubtedly the potential for receiving a check from Uncle Sam. You now may be asking; Who is eligible and how much will the check be for?  

Refundable tax credits will begin at $1,200 for individual taxpayers, increasing to $2,400 for married couples filing jointly. For those taxpayers with children under the age of 17, you will receive an additional $500 per child. Therefore, a family of four could receive up to $3,400 as long as they meet the AGI (Adjusted Gross Income) limitations. The AGI limitations do create some complexity to who will receive payments, especially because of how the bill will look through to that eligibility.  

The applicable threshold amounts are:

  • Individual - $75,000
  • Head of Household - $112,500
  • Married Joint - $150,000

For every dollar a taxpayer’s income exceeds the above thresholds, their credit will be reduced by 5% until they are completely phased out. For example:

A married couple with one child, and an AGI of $175,000 would lose $1,250 of their credit and receive a total of $1,650. ($2,400 for married couple + $500 for one child = $2,900 :: $25,000 over the threshold multiplied by 5% = $1,250. $2,900-$1,250 = $1,650)

The most troubling aspect of how these payments will be disbursed is that they will be based on taxable income from either 2018 or 2019, (dependent on the most recent return the IRS has on file) while it will be ultimately reconciled on 2020 returns. (In April of 2021) To simplify, people will receive an estimated payment based on 2018/2019 income, but if their 2020 return illustrates that they are eligible, they will receive a payment at that point.  As a result, it is likely that many taxpayers who have been laid off, furloughed, or are earning significantly less now, may not receive a payment until 2021! In our opinion, a more effective method would have been to send all taxpayers a payment, based on their previous filing status (Single, Married, Head of Household), which could ultimately be reconciled on their 2020 return.  

It appears that payments will not be processed for at least three weeks, but we could possibly be into May before most receive their stimulus checks. The act authorizes the IRS to direct deposit payments if the Treasury department has a bank account on file based on a 2018/2019 return. If not, the payment will be sent to the last known address on file. Social Security benefit receivers should receive their payment into the same account electronically.  

Required Minimum Distributions (RMD) Waived for 2020

After a strong year for equity and bond investors in 2019, most retirement account owners saw a significant increase to their RMDs for 2020. However, the CARES Act included a provision to eliminate RMDs for most retirement plans. (Traditional IRAs, SEP and SIMPLE IRAs, 401(k), 403(b), and 457(b) plans) Even inherited IRA owners that were “stretching” distributions are no longer required to satisfy an RMD for 2020. If you have already taken a retirement account distribution in 2020, you cannot “send it back”.  

RMD procrastinators get an additional break, as those who turned 70.5 in 2019 (and deferred their first RMD payments to 2020) get to avoid both required distributions. (2019 RMD was due April 1, and 2020 RMD was due December 31st. The act eliminates any RMD needed to be taken in 2020)

Coronavirus Related Distributions and Retirement Plan Loans

The CARES Act provides a number of additional tax benefits to individuals impacted by the Coronavirus, in addition to some improvements for employer-sponsored plan loans.  

The most notable potential benefit is the exemption of the 10% withdrawal penalty for individuals under the age 59 ½. In addition, the income tax owed by any retirement distribution can be stretched evenly from 2020-2022. (However, the taxpayer can elect to include it all in 2020 if they prefer.) Another option provided is the ability to repay the retirement account distribution back into the retirement account over three years. This could be completed in one rollover back into the plan, or multiple rollovers. The three-year period begins on the day after the distribution is received. There are no mandatory withholding requirements for employer-sponsored retirement distributions either, which are commonly 20% on the federal level under normal circumstances.  

To be eligible as a Coronavirus-related distribution, an individual must meet one of the following requirements (Although it seems like the IRS is making the eligibility broad):

  • Been diagnosed with COVID-19
  • A spouse or dependent has been diagnosed with COVID-19
  • Been laid off, furloughed, or had workhours reduced because of the disease and experienced an adverse financial effect
  • Unable to work due to childcare as a result of COVID-19
  • Business owners that have had to close or reduce hours because of COVID-19
  • Other reasons that the IRS may deem acceptable to qualify

In regard to employer-sponsored plan loans, participants are now eligible to borrow up to a maximum of $100,000 (previously $50,000) and can delay payments from the date the loan was initiated (through end of 2020) for up to one year. Previously under regular loan rules, participants were eligible to borrow up to 50% of their plan’s vested balance. Under the CARES provisions, 100% of the vested plan balance can now be used (up to the $100,000 maximum). The same requirements that apply to the distribution rules apply to the loan provisions.

Charitable Contributions

The CARES Act created a new above-the-line deduction for charitable cash contributions up to $300. While it is a positive that more taxpayers can potentially benefit in some way, the tax ‘savings’ will only range from approximately $35 to those in a 12% bracket to $110 to those in a 37% bracket. (Even by taking a standard deduction)

The AGI limit, which previously was 60% on cash contributions, has been temporarily repealed for 2020. Therefore, for cash donations to charities in 2020, taxpayers may offset 100% of their income. If their charitable donations exceed 100% of their AGI, they can carry-forward that deduction for 5 years. It is important to note that the donations must be made in cash (no appreciated securities) and cannot be used to fund donor-advised funds or 509(a)(3) “supporting organizations”.  

Small Business Owner Relief and Unemployment Compensation

The Paycheck Protection Program under the CARES Act is one of the most significant provisions for small business owners, as it provides the opportunity to assist with payroll and salary costs, rent, healthcare, mortgage interest, and utilities to name a few. Lenders will be able to provide SBA loans up to the lesser of $10 million or 2.5 times the average monthly payroll costs over the previous year. This program will be accessible to businesses that have fewer than 500 employees. (with exceptions based on NAICS Code)

The largest potential benefit of a loan under the Paycheck Protection Benefit is the possibility of having a portion (or the entire) loan forgiven. We won’t go into details in this post on the requirements for loan forgiveness, but this part of the bill does provide certain business owners a large deal of relief during this unprecedented time.  

In regard to unemployment benefits, Uncle Sam is generally picking up more of the bill, by paying for the first week of unemployment which was previously burdened by the states. In addition, compensation can now be extended by up to 13 weeks, and the states have the ability to increase their benefits by up to $600 per week with dollars funded by the federal government.  

Accretive’s Initiative to Help  

Beyond doing our roles in social distancing, in an attempt to flatten the curve of case growth, all three of us are focusing on ways we can be of additional assistance to not only our clients, but others in need during this difficult time. Even before the outbreak of COVID-19, Accretive had made a 2020 initiative to offer more pro-bono financial planning for those in need. In 2019, we partnered with “Building Homes for Hero’s”, which is a program that assists veterans across the country with financial planning advice.  

As we approach our final days of Q1, we want to offer financial planning and budgeting sessions on a pro-bono basis for those negatively impacted by COVID-19. Whether you or a family member has been diagnosed, or you have lost work or hours due to the virus, we want to be of assistance. We will also help you navigate the CARES act to ensure you have access to maximum benefits where and when applicable.  

If you know anyone that you feel could benefit from reading this, please don’t hesitate to forward it along. We wish you all well and look forward to getting through this difficult time as soon as possible.

Financial Planning

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