Coronavirus Aid, Relief, and Economic Security (CARES) Act
On March 27th, 2020, The President signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to assist and provide support for workers, families, businesses, health care, and various other programs to help stabilize the economy during the COVID-19 virus pandemic. The CARES Act contains several provisions related to retirement plans and other employee benefit programs that we have summarized for you. If any of you are masochists at heart or happen to find yourself yearning for some reading material while following the “stay at home orders”, you can find the entire 335 page CARES Act here. If you have questions regarding further details within the Act and how it may pertain to your situation, give us a call, and we can do a deeper dive into the "exciting" world of legislation together. Please note this communication should not be construed as advice. Always consult your Tax Consultant, Legal Council, or Investment Advisor regarding how any decision made may impact your current situation.
Coronavirus-Related Distributions
Coronavirus-Related Distributions are distributions taken from IRA’s, employer-sponsored retirement plans such as 401(K) ’s, or a combination of both in the year 2020 by individuals that have been impacted by the COVID-19 virus.
Individuals considered affected by the illness include:
If you have been diagnosed, by a Centers for Disease and Control approved test, with COVID-19;
If you have a spouse or dependent who has been diagnosed, by a Centers for Disease and Control approved analysis, with COVID-19;
If you experience financial consequences as a result of being quarantined, furloughed, being laid off, or having reduced work hours because of the disease;
If you are unable to work because you lack childcare as a result of the disease;
If you own a business that has closed or operates under reduced hours because of the condition; or
If you meet the Internal Revenue Service’s exception for a specific circumstance related to the virus. The IRS will likely take a liberal view as to how the illness may impact an individual. Enough to possibly qualify for a Coronavirus Related Distribution. (Note: As of March 30th, 2020, the Coronavirus-Related distributions are not available to individuals who continue to work with a reduced salary; however, the Secretary of Treasury has the authority to expand the list of individuals to whom the distribution is available.)
There are several potential tax benefits associated with Coronavirus-Related Distributions. Several of these include:
Exemption from the 10% Early Withdrawal Penalty (Under 59 1/2 years old) - For Distributions of up to $100,000 from qualified retirement plans and IRAs, including 401(k) plans. Your standard Federal and State Income Tax rates will apply.
Distributions can be Repaid Over 3 Years - Beginning on the day after an individual request and receives a Coronavirus-Related Distribution, they have up to three years to roll a portion or all of the distribution back into a retirement account. Repayment can be made via multiple partial rollovers, a single rollover, or made throughout the three years. If distributions are rolled back in using this option, an amended Tax return should be filed to claim a refund of any taxes paid in attribute to the amount rolled over.
The capability of Spreading the Income Over 3 Years – As a default, the income from a Coronavirus-Related Distribution is split evenly over the years 2020, 2021, and 2022. However, a taxpayer can elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income.
Enhancements To Loans From Employer-Sponsored Retirement Plans
Many employer-sponsored retirement plans offer participants the option of taking a loan from a portion of their retirement assets. Individuals considered affected by the virus (using the same definition as outlined above for Coronavirus-Related Distributions), the CARES Act enhances their ‘regular’ plan loan rules in the following ways:
Maximum Loan Amount Increased to $100,000 – For affected individuals of the virus, the maximum loan amount borrowed from their employer plan is $100,000. (Before the CARE Act, the maximum borrowed amount was $50,000.)
100% of the Vested Balance Can Be Used – For affected individuals, the CARE Act allows taking a loan equal to their vested sponsored plan balance, up to the maximum amount of $100,000.
Delay of Payments – Payments that would otherwise be due on the plan loan from the date enacted, through the end of 2020, can be delayed for up to one year.
Required Minimum Distributions Are Waived for the year 2020
The CARES Act has suspended Required Minimum Distributions (RMDs) during the year 2020. This provision is extensive covering IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and Governmental 457(b) plans. The relief applies to retirement account owners, themselves, in addition to beneficiaries taking stretch distributions, or what is considered Inherited IRA Required Minimum Death Distributions. Even though Required Minimum Distributions have been suspended for 2020, Voluntary retirement distributions are still allowed. Voluntary retirement distributions include Qualified Charitable Distributions (QCDs) for IRA owners and IRA beneficiaries age 70 1/2 or older. Although Qualified Charitable Distributions made in 2020 will not offset any amount of a taxpayer’s Required Minimum Distribution (because they don’t have one), it still allows an individual to use entirely pre-tax dollars to satisfy any charitable intent.
*Speaking of Charitable giving, if you are interested in setting up a Donor Advised Charitable Fund account, let us know. We would be happy to discuss how a Donor Advised Charitable Fund account offers a uniquely flexible way to manage your charitable giving. With this account, you can:
Realize same-year tax benefits if you itemize deductions
Potentially eliminate capital gains tax on the contribution of appreciated non-cash assets1 and investments
Give when it is convenient and meets your charitable goals
Manage your giving online
Create a lasting philanthropic legacy
Returning Unwanted 2020 RMD’s That Have Already Been Distributed
Since 2020 Required Minimum Distributions have been waived, the CARE Act is allowing individuals that have already taken their 2020 RMD’s, within 60 days from the distribution date, to return unwanted and no longer necessary RMDs. If this applies to you, we can discuss the possibility and procedure of rolling back in an RMD taken in 2020.
The 5-Year Rule For Inherited IRA’s - Year 2020 Is Not counted.
Inclusive of the CARES Act’s suspension of RMDs for 2020, is the five-year Rule for inherited IRA’s, which will not include the year 2020 in the calculation. This pertains to Non-Designated Beneficiaries (e.g., charities, estates, non-See-Through Trusts) who inherit a retirement account from decedents who pass away before reaching their required minimum distribution date.
Within the Rule, these beneficiaries must distribute the entirety of their inherited assets by the end of the fifth year following the original retirement account owner’s death. The CARES Act allows the year 2020 to be negated, or not counted, as one of those five years. This means for Non-Designated Beneficiaries subject to the 5-Year Rule who inherited from a decedent passing between the years 2015 through 2019, the 5-Year Rule is essentially a 6-Year Rule.
Please note, the SECURE Act 10-Year Rule for Non-Eligible Designated Beneficiaries of Inherited IRA’s, there will not be an extension. 2020 is the first year that an individual could have died and had a beneficiary subject to the 10-Year Rule. And the 10-Year Rule does not begin until the year after the year of death. Therefore, 2020 would not count as 1 of the 10 years, for purposes of the 10-Year Rule.
New $300 Above-The-Line Deduction For “Qualified Charitable Contributions.”
Having removed many of the above the-line-deductions via the Tax Cuts and Job Act (TCJA), supposedly in the interest of simplicity, Congress promptly introduces a new above-the-line deduction in the CARES Act for Qualified Charitable Contributions made to qualifying charities.
From a tax standpoint, there is both good news and bad news. The bad news is that the deduction, which is valid for tax years beginning in 2020, is limited to $300. Even for taxpayers in the highest tax bracket of 37%, that ‘only’ amounts to a tax-bill-savings of $111. Indeed every little bit helps, but it’s hardly going to be a big deal for most, as for a taxpayer in the 12% bracket, the entire deduction would amount to whole $36 of tax savings. (Facetious sounds inserted here.)
The good news is, while the impact on an individual basis may not amount to a hill of beans, a substantial number of people will be able to take advantage of this benefit. To claim the deduction, a taxpayer cannot itemize deductions on their Federal return. Still, thanks to the TCJA’s near-doubling of the standard deduction, only about 10% of taxpayers today itemize deductions on their Federal return. Which, in turn, means approximately 90% of taxpayers can potentially benefit from this new tax break.
Please note: Qualified Charitable Contributions must be made in cash, and cannot be used to fund either donor-advised funds (DAFs) or 509(a)(3) “supporting organizations.”
The Adjusted Growth Income (AGI) Limit For Cash Charitable Contributions is Temporarily Repealed
Section 2205 of the CARES Act temporarily increases the AGI limit on cash contributions made to charities from a maximum of 60% of AGI to a maximum of 100% of AGI for “qualified contributions.” Therefore, an individual can completely clear out their 2020 tax liability with charitable contributions. If the charitable contributions total exceeds the 2020 100%-of-AGI limit, the excess may be carried forward as a charitable contribution for up to 5 years.
Note: This provision prohibits such contributions from funding donor-advised funds (DAFs) or 509(a)(3) “supporting organizations.”
Aberle Investment Management LLC
200 Capitol St., #201, Eagle, CO 81631
(970) 432-7040 http://www.aberleinv.com/
Aberle Investment Management LLC, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future returns.