By now we’re sure that all of you have read about the historic $2.2 trillion stimulus package that was passed by Congress and signed by President Trump on March 31, 2020. The CARES (Coronavirus Aid, Relief, and Economic Security) Act has broad, sweeping measures aimed at supporting our nation’s economy, companies and citizens. The provisions are numerous and cover everything from direct payments to US citizens, paid sick leave, increased unemployment benefits, and access to health care, to corporate incentives to keep workers employed, restrictions on stock buybacks, and increased lending to small businesses, some of which could be forgivable.
Rather than try to do a full recap of the Act, we wanted to highlight for you the points that are most salient to our financial planning practice. Of course, each of you will be affected by these provisions in a different way and to varying extents.
Personal Rebates/Checks: The Act provides for a payment of $1,200 to individuals with a 2018 or 2019 adjusted gross income (AGI) up to $75,000 (phased out above that and capped at $99,000). Couples filing jointly will receive $2,400 with a 2018 or 2019 adjusted gross income of up to $150,000 (phased out above that and capped at $198,000). In addition, families will receive $500 per child age 16 or under (assuming such child is a qualified dependent on their tax return).
Planning point: If your adjusted gross income on your 2019 return is substantially lower than your 2018 return and would allow you to receive a rebate check, you should file your 2019 return as soon as possible.
Taxes: The deadline to file your personal tax return is now July 15th. This means that all other contribution deadlines, such as those for IRA and HSA contributions, are also delayed until July. The deadline to make any remaining payments for 2019 is also delayed without penalty or interest until July 15th. (A note for clients in states with state income tax: not all states have extended this deadline in a similar manner, so you should be sure to check with your tax preparer on state-specific filing requirements and any changes.)
IRA Withdrawals/Distributions: Persons who are otherwise required to take minimum distributions (RMDs) are exempt from having to make a distribution in 2020. This provision applies to all retirement plans including 401(k)s, 403(b)s and IRAs. As a reminder, the SECURE Act, which was signed into law in December 2019, delayed the first RMD—for those not already taking them—to the year the taxpayer turns 72.
Planning point: Based on cash flow needs and marginal income tax brackets, it may be advantageous to convert some portion of your traditional IRA to a Roth IRA in 2020. This conversion would have the dual benefit of keeping taxes stable over a number of years and adding to your Roth IRA, which provides for tax-free withdrawals in future years. We’ll be looking into the feasibility of this type of transaction for each of our clients, and will reach out if we determine it would be beneficial to you.
In addition, the IRS will waive the 10% penalty for making retirement plan distributions prior to age 59½. Furthermore, the tax on these withdrawals (taxed at your marginal tax bracket) will be due over a 3-year period, and you will have the ability to repay the funds over a 3-year period (normally a 60-day repayment period).
Charitable Gifts: The Act grants an additional $300 line item deduction, above the standard deduction, for qualified charitable contributions. For those that may still itemize deductions, the Act suspends the contribution base limits (i.e., 30%/60% of AGI), assuming that the tax filer includes such an election with their taxes.
Planning point: We recommend that all clients who will be making charitable gifts in 2020 give at least $300 from a checking account or brokerage account (i.e., a taxable account). The recommendation holds true even for those taking advantage of a Donor-Advised Fund (DAF) or those using their IRAs to make qualified charitable distributions (QCDs). As an example, if you planned to give $1,000 in 2020 and you normally utilize QCDs, we recommend you give $300 from your checking account and $700 from your IRA. Making these gifts from multiple accounts will allow you to take advantage of the increased “above the line” deduction and the reduction in taxable income by using QCDs. (Note: QCDs can only be utilized by taxpayers who are over age 70 ½.)
We look forward to talking with each of you about how this may affect your financial plan and hope you will reach out in the days ahead.