KEY FEATURES OF THE NEW “CARES” ACT

Joe Erickson

Written by Joe Erickson, CPA and Shareholder

The Corona Aid, Relief and Economic Security CARES Act was passed on Friday 3/27/2020 in response to the COVID-19 coronavirus pandemic.  This bill will impact millions of businesses and individuals throughout the U.S., and is designed to help mitigate the financial ramifications of COVID-19 on the U.S. economy.  Below are several of the key parts of CARES that apply to large numbers of Americans.

Cash Payment to Individuals

Individuals with less than $75,000 of AGI (Adjusted Gross Income) can expect a one-time cash payment of $1,200.  Married couples with AGI of less than $150,000 will receive $1,200 each, and families will get an additional $500 per child.

The checks are reduced by 5% of any AGI over the above amounts, meaning that for individuals, the checks are completely phased out when AGI is above $99,000.  For married couples that figure is $198,000.

These AGI figures—and therefore cash payments—are based on either your 2018 or 2019 tax filing, whatever is your latest tax return on record.  People who receive Social Security Benefits but don’t file tax returns are still eligible.  In that case, their checks will be based on information provided by the Social Security Administration (SSA) office.

Waiver of Early Withdrawal Penalty

The Cares Act also allows individuals under the age of 59½ to withdraw up to $100,000 from qualified retirement accounts (IRAs, 401(k), profit sharing, etc.) without incurring the normal 10% early withdrawal penalty if they meet one of the following conditions:

  1. They are diagnosed with COVID-19;
  2. Their spouse or dependent is diagnosed with COVID-19; or
  3. They suffer financial consequences as a result of being quarantined, laid off, furloughed, or having work hours reduced.

Note that this waiver of penalties only applies to withdrawals in calendar year 2020.

RMD Waiver

Required Minimum Distribution (RMD) requirements have also been waived for 2020.  This means that you are not required to take a 2020 distribution from your IRA or other qualified retirement if you are over the age of 70½ (or 72 if you turn 70½ in 2020 or later, according to the new rules in the SECURE Act, which went into effect on 1/1/2020.

Inherited IRA’s also get this benefit, regardless of the beneficiary’s age.  Note, however, that inherited IRA’s created by a death in 2020 (or later) are still subject to the SECURE Act provision requiring that non-spouse beneficiaries only have 10 years to take out the entire Inherited IRA balance. 

Charitable Deductions

The CARES Act also allows your first $300 of donations to be taken as an “above the line” deduction, meaning that you can reduce your taxable income by that amount even if you don’t itemize.  This will allow everyone to get a tax benefit from $300 in donations, even if they use the higher Standard Deduction enacted by the Tax Cuts and Jobs Act of 2018.

Business Credits

The CARES Act provides employers with a refundable payroll tax credit equal to 50% of certain qualified wages paid to employees in calendar quarters during which the employer is engaged in a business, either if:

  1. The operation of that trade or business is suspended due to a government order related to COVID-19; or
  2. The gross receipts for that trade or business are less then 50% of the gross receipts for the same calendar quarter last year. 

The credit is capped at $5,000 per employee for any or all calendar quarters.  We are awaiting details on this credit is to be claimed, e.g., if it will be on employers’ 2020 tax returns or on their payroll tax return filings each quarter.

The CARES Act will permit employers and self-employed individuals who meet one of the above conditions to defer payment of the 6.2% employer share of Social Security taxes that accrue through the end of 2020.  The tax would be payable over the next two years, with half being due by December 31, 2021 and the other half due by December 31, 2022. 

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