How the CARES Act May Impact Your Family Finances and Tax Planning Right Now

The $2.2 trillion coronavirus relief bill or CARES Act was passed by Congress on a bi-partisan vote and signed into law in late March by President Trump. According to the U.S. Treasury Department, the CARES Act “provides fast and direct economic assistance for American workers, families, and small businesses, and preserves jobs for our American industries.”    

But what does this legislation mean to you? How will it impact the economic well-being of you and your family, now and in the future? 

What Are the Elements of the CARES Act? 

There are four primary features of the CARES Act:

• Assistance for American workers and families
• Assistance for small businesses
• Assistance to state and local governments
• Preserving jobs for American industry

Many of us may be affected by government support that takes steps to retain employees and keep businesses solvent. However, this article will focus on the assistance that may be offered to individuals and their families.

How the CARES Act May Impact Individuals Today

Direct cash payments from the U.S. Treasury to individuals are in process. You may have already received a check or a direct deposit to your account. The stimulus plan allows for a $1,200 payment for adults and $500 for children but has income limits. It begins to phase out above an adjusted gross income of $75,000 for single filers and $150,000 for couples filing jointly. This support should be considered a one-time event, but some members of Congress have pushed for recurring payments.

Another facet of the legislation calls for expanded unemployment benefits. On top of existing state unemployment compensation, the bill calls for an additional $600 per week be paid for up to four months.

The pool of workers eligible to receive unemployment benefits was also greatly expanded under the CARES Act. For the first time, contract workers, freelancers and gig workers will all be able to file for benefits.

The bill also expedites the timeline to receive unemployment benefits. It funds the elimination of the typical one-week waiting period so that people who lose their job can begin receiving benefits right away.

Mortgage relief is available in many cases, but the borrower must request this action. If you can show hardship due to COVID-19, your mortgage servicer is required to grant a 180-day moratorium on payments with an additional 180 days available on request. 

How the CARES Act May Impact Individuals in the Future

There are a number of implications for the 2020 tax year and beyond in the CARES Act.

1. Charitable contributions: Regardless of whether taxpayers itemize their deductions, they may deduct donations of up to $300 to charitable organizations in 2020. Additionally, the act increases the limitations on deductions for such contributions by individuals who do itemize. The limit of 50 percent of adjusted gross income is suspended for 2020.
2. Penalty on retirement plan withdrawals: The bill waives the 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes. Examples of a COVID-19 related situation: 
    
   • You or a family member has contracted the virus
   • You have been quarantined, furloughed, laid off or have had work hours reduced due to the coronavirus
   • You are unable to work because of a lack of child care due to the coronavirus
     
     
3. Tax treatment on income for distributions: The income that is recognized from these early withdrawals may be spread over the tax years 2020, 2021 and 2022.
4. Re-contributions to plans: Withdrawals from eligible retirement plans may be paid back over that same 3-year time frame. Importantly, the amounts that you recontribute will not count toward that year’s maximum contribution limit.
5. Suspension of required minimum distributions (RMDs): For those who have reached the age of 70 ½, the normal RMD has been waived for the tax year 2020. So, if your retirement is in an IRA, 401(k) or 403(b) plan, you may defer taking the distribution this year.

The Potential CARES Act Impacts on Family Finances Conclusion

Some of the benefits of the CARES Act are reasonably straightforward as the government strives to get cash to consumers who are vulnerable in this severe economic downturn.

Other facets of the legislation, though, are a little more complicated and may require careful attention. There are potentially multiple impacts on your tax planning for the 2020 tax year and beyond. If you have questions about how the legislation affects you, please contact your financial advisor.

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