This is the second article in a three-part series on the CARES Act, a $2 trillion stimulus bill that was signed into law on March 27, 2020. The law is designed to offer wide-ranging assistance to households and businesses, providing everything from cash infusions to hospitals and expanded access to COVID-19 testing to small business loans to expanded unemployment benefits.

This article provides an overview of aspects of the bill that provide relief for individuals and families, including the individual stimulus payments. You can read our overview of relief provisions for small businesses here.

The CARES Act, signed by President Trump on March 27th, has set aside over $600 billion to help households weather the coronavirus crisis, with the vast majority of that funding going towards direct cash payments to households and providing larger unemployment payments to more people.

While the cash payments and unemployment insurance are the two most prominent pieces of the Act, numerous, less noticeable provisions will provide tangible benefits to many households. In this article, we review eligibility and payment amounts for both the stimulus payments and the expanded unemployment insurance as well as several other provisions of the Act that may benefit you.

Recovery Rebates (Individual Stimulus Payments)

What Is It: One-time cash payments
Who Is Eligible: All taxpayers below specific adjusted gross income (AGI) thresholds
When Is It Applicable: Payments estimated to arrive in April or May

One of the most discussed aspects of the CARES Act is the individual stimulus payments that the Act provides. These payments are being structured as tax “recovery rebates” for 2020 that use a taxpayer’s 2018 or 2019 tax return to calculate the size of the rebate. The Tax Foundation estimates that about 90% of taxpayers will receive some rebate under the Act.

Through the recovery rebate program, single filers will receive up to $1,200, married couples filing a joint return will receive up to $2,400, and an additional $500 will be provided for each child under 17 in the household. However, the adult rebate begins to be phased out above a specific adjusted gross income (AGI) depending on filing status:

  • Married filing jointly: $150,000
  • Head of Household: $112,500
  • All Other Filers: $75,000

Specifically, the recovery rebate will be reduced by $5 for every $100 of income above the threshold amount.

Example: A married couple who files a joint return has three children under the age of 17. If their AGI is $150,000 or lower, they will receive the maximum recovery rebate of $2,400 + $500 + $500 + $500 = $3,900. If instead their AGI is $170,000, their recovery rebate would be reduced by $20,000 x 5% = $1,000, so they would receive $2,900 in total.

A strange feature of the rebate is that the initial amount will be paid based on a taxpayer’s 2018 or 2019 tax return, but the rebate will be “finalized” in 2020 taxes. Essentially, the rebate will be paid now based on estimated need, but if a taxpayer’s 2020 return shows that they should have been entitled to more assistance, they will receive additional funds in 2021. On the other hand, if a taxpayer’s 2020 return shows that they were entitled to less assistance than they received, they will not need to return the overpayment.

This feature creates an unfortunate loophole for taxpayers who may have had higher income in 2018 or 2019 and have since lost substantial income. While those taxpayers should still benefit, they won’t receive any cash assistance until they file their 2020 tax return in 2021. If you had a high income in 2018 but an income below the threshold amount in 2019 and have not yet filed your 2019 tax return, you may want to file as soon as possible. We do not yet know what the cutoff date will be for calculating rebates, but filing your 2019 taxes early should increase the chance that your rebate is calculated based on the lower income amount.

Recovery rebates will be sent to the account in which a taxpayer receives their Social Security benefits, the account into which their 2018 or 2019 refund was deposited, or to the last known address on file. This has the potential to create problems for those who have closed bank accounts and/or moved, but as of now there is no guidance on how to correct potential issues before checks are sent. The CARES Act does at least provide for a hotline with the IRS for tracking down missing rebates, but making sure you receive the amount warranted may be painful.

If you would like to estimate your recovery rebate, first calculate your maximum possible benefit:

  • Add $1,200 for each adult taxpayer in the household
  • Add $500 per child under 17 in the household

Then, find your AGI from 2019 if you have filed already or 2018 if not. Compare your AGI to the phaseout amounts ($150,000 if married filing jointly, $112,500 if the head of household, $75,000 for all others).

  • If your AGI is below the phaseout amount, your recovery rebate is the maximum possible benefit.
  • If your AGI is above the phaseout amount, estimate your recovery rebate: your maximum possible benefit – [(your AGI – threshold amount) x 5%]

Expanded Unemployment Insurance (UI)

What Is It: Increased unemployment insurance payments
Who Is Eligible: Unemployed workers, including many who would not have qualified for UI before CARES
When Is It Applicable: Up to 39 weeks of benefits in 2020

The CARES Act significantly increases the number of people who are eligible to apply for unemployment insurance, the amount of money that unemployed workers will receive, and the length of the time they will receive the benefit.

Prior to the CARES Act, unemployment insurance was structured such that many of the people who are most directly affected by the pandemic (independent contractors, part-time workers, etc.) were not eligible to collect it. CARES provides a greatly expanded pandemic unemployment assistance program that includes self-employed individuals and many individuals who would be ineligible for regular UI.

The Federal government will also provide an additional $600 per week for four months to workers on unemployment insurance above what they would receive from their state and will fund an additional 13 weeks of benefits for those who are near the end of their regular UI period.

The CARES Act also hopes to incentivize states that have a “waiting week” provision to suspend that period. In many states, unemployed workers are unable to collect UI for the first week they are unemployed in an attempt to encourage them to find a new job quickly. Under the CARES Act, the Federal government will fully fund the first week of unemployment insurance in those states that suspend it and allow workers to collect benefits immediately.

Retirement Plan Loans and Distributions

What Is It: Coronavirus-related distributions and enhanced loans
Who Is Eligible: People affected by the coronavirus with IRA or employer-sponsored retirement plans
When Is It Applicable: 2020

The CARES Act creates special rules for coronavirus-related distributions and loans from retirement plans in calendar year 2020, which will allow taxpayers who are affected by the pandemic to more easily access their retirement savings in an emergency. Distributions and loans qualify for special treatment if they are:

  • $100,000 or less
  • Made from an IRA or employer-sponsored retirement plan
  • Made in 2020
  • Made by someone who has been impacted by the coronavirus, which means:
    • The individual or a spouse or dependent was diagnosed with COVID-19,
    • The individual was quarantined, furloughed, or laid off, or saw their work hours reduced,
    • The individual cannot work because they lost childcare due to the virus,
    • The individual owns a business that closed or had to operate under reduced hours, or
    • The individual suffers harm from the pandemic in some other way that the IRS approves.

Coronavirus-related distributions allow taxpayers to withdraw funding from their retirement accounts with the following advantages:

  • Individuals under the age of 59 ½ can access their retirement funds without paying the usual 10% penalty and without the usual mandatory Federal withholding of 20%.
  • Individuals have the option to roll all or a portion of their distribution back into their retirement account within three years of receiving the distribution.
  • By default, the income from a distribution is split evenly over 2020, 2021, and 2022, but a taxpayer can include all distribution income in their 2020 income if that is more tax-advantageous.

Instead of taking income from a qualified retirement plan, taxpayers can also take a loan against the value of their account. The CARES Act changes the rules for these loans:

  • The maximum loan has increased from $50,000 to $100,000
  • 100% of the account’s vested balance can be used for a loan. In normal years, an individual could only take a loan of 50% of a vested balance above $20,000.
  • Any payments due on the plan loan in 2020 can be delayed for up to one year.

Required Minimum Distributions (RMDs) Are Waived

What Is It: Waiver of RMDs
Who Is Eligible: Anyone who would have been required to take an RMD
When Is It Applicable: 2020

The CARES Act suspends RMDs for the entirety of 2020 for both account holders and beneficiaries taking stretch distributions. Voluntary distributions, of course, remain allowed, whether the account holder needs the income to offset their expenses or if they want to make a Qualified Charitable Distribution this year to use pre-tax dollars for giving.

Those individuals who turned 70 ½ in 2019 but had elected to take their first RMD between January and March of 2020 instead of during 2019 will receive a double benefit: they will not be required to take their 2019 or their 2020 RMD, as any RMD that would take place in 2020 is waived under the Act. (As a reminder, the SECURE Act changed the age at which RMDs begin to 72 starting in 2020, so if you turn 70 ½ in the coming year, none of this applies to you.)

If you have already taken your 2020 RMD but do not need the income this year, it is possible to “return” your RMD as long as you are the account holder and not a beneficiary. If the distribution was made within the last 60 days, you would simply be able to write a check or transfer the amount of the RMD back into the account as a rollover. If the distribution was made earlier than that and you can show that you have been impacted by the coronavirus, you should be able to roll the amount back into your account within the next three years under the same guidelines being used for coronavirus-related distributions.

Charitable Contribution Deduction

What Is It: $300 deduction for Qualified Charitable Contributions
Who Is Eligible: All taxpayers who do not itemize their taxes
When Is It Applicable: 2020 on

The Tax Cuts and Jobs Act eliminated the tax benefits of charitable contributions for the vast majority of taxpayers, but the CARES Act adds back an above-the-line deduction for donations for those who cannot itemize on their Federal return. The deduction is limited to only $300 and only contributions made in cash directly to qualifying non-profits (so contributions to donor-advised funds do not apply), but it can still provide most taxpayers with a small tax break.

Student Loan Payment Relief

What Is It: Suspension of Federal student loan payments
Who Is Eligible: Anyone making payments on Federal student loans
When Is It Applicable: Until September 30, 2020

The CARES Act suspends all required payments on Federal student loans and prevents additional interest from accruing on that debt through September 30, 2020. Involuntary debt collections such as wage garnishment are also suspended during that period. These months do still count towards forgiveness programs like the Public Service Loan Forgiveness program, so those who are hoping to take advantage of those programs will not see their eligibility affected.

If you have been making voluntary rather than required payments on your loans, those will not automatically be suspended under the CARES Act. You would need to contact your loan provider directly to suspend these payments, though any payments you can make before September 30 are effectively payments on 0% interest debt.

This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business.  The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice.  The views expressed are those of the author(s) as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee its accuracy.   

Share This