Highlights of the CARES Act
Coronavirus Aid, Relief, and Economic Security Act
The CARES Act was signed into law on March 27, 2020, in response to the 2020 COVID-19 pandemic. It includes temporary rules to provide tax savings to individuals and businesses affected by the economic slowdown resulting from efforts to slow the spread of the virus. Most CARES Act provisions are aimed at providing temporary but sustainable cash flow to individuals and businesses. The Act also includes some tax incentives designed to promote charitable giving. The new rules can significantly impact your estate plan as the country weathers the COVID-19 pandemic.
The CARES Act includes new distribution and loan options for those adversely impacted by coronavirus. Most significantly, early distribution penalties will be waived under certain circumstances.
RMD. Required Minimum Distributions (RMD) are waived for the calendar year 2020 for participants in 401(k), 403(a) and (b) plans, 457, and IRAs. Unfortunately, this is not available for defined benefit plans. Individuals who have already taken RMD for 2020 are not allowed to repay it into their retirement plan. However, these individuals may still avoid income tax on the RMD already received by rolling it over into a new IRA within 60 days of the distribution.
Penalty-Free. The 10% early distribution penalty tax that would otherwise apply to the majority of distributions made before a participant turns age 59 ½ is waived for “coronavirus-related distributions” (CRD) made at any time during 2020 from qualified retirement plans for distributions of up to $100,000. The distribution option is permissive, not mandatory, for eligible plans such as IRAs, 401(k)s, 403(a) and (b) plans, and 457 plans.
This option is not available for all taxpayers. Rather, is available for qualifying individuals who are diagnosed with coronavirus, or whose spouse or dependent has been diagnosed with it, or who has experienced adverse financial consequences from a coronavirus-related quarantine, furlough, layoff, work reduction, business closure or reduction in hours (for business owners) or an inability to work due to lack of child care related to coronavirus. The distributions will be subject to income tax, but the qualifying individual may opt to spread the payments evenly over three years rather than having to pay it all in 2020. The participant may also recontribute the distributed funds to the retirement plan or another retirement plan (with an exception for 457 plan distributions), by a single rollover or multiple rollovers, within three years of the date of the distribution regardless of any contribution limit established by the plan.
Plan Loans. Additionally, loan limits from qualified plans have been increased. Qualified individuals can borrow up to the lesser of $100,000 or 100% of the participant’s vested account balance, up from the previous limits of $50,000 or 50%. However, loans are not permitted from IRAs. For qualified individuals with existing loans from a retirement plan due to be repaid by December 31, 2020, the participant has the option to delay repayment by one year.
Charitable giving deceased following changes to the tax code in 2017. In an effort to encourage more philanthropy, the CARES Act includes a number of incentives to encourage individuals to provide assistance to charitable organizations supporting individuals and businesses most affected by the coronavirus crisis.
- Taxpayers are permitted to claim a $300 above-the-line deduction for cash contributions made to public charities during 2020.
- Taxpayers who itemize deductions and make cash contributions to any public charities during 2020 are not limited to the usual deduction of 60% of modified adjusted gross income (AGI) Instead, the deduction could be as much as 100% of their AGI. Carryforward is also available for taxpayers who make contributions exceeding the 2020 limit. Unfortunately, this favorable treatment is not available for contributions from private foundations or donor-advised funds.
More to Come
The pandemic appears to be far from over. Congress and the Trump Administration may likely enact additional legislation to provide relief for both individuals and businesses. The items addressed in this article are just the tip of the CARES Act iceberg. And there will be more to come. Check back to our website for further updates, or feel free to schedule an appointment with Brian K. Kirby to discuss how you may adjust your estate plan in response to these developments.