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Should You Care About the CARES Act?
Making the most of your personal finances requires that you do the big things right, of course, but also that you do many small things right as well. Small prudent tweaks and changes you make to your finances consistently can compound into a massive improvement over time. Today, we take a look at the CARES Act and at just a few of its provisions that may be relevant and useful to investors. The $2.2 trillion Coronavirus Aid, Relief and Economic Security Act was signed into law on March 27, 2020 and is the largest economic relief package in American history.
Much of the law is geared toward helping businesses, but there are several provisions relevant to individuals.
Required Minimum Distributions (RMDs) Suspended
In calendar year 2020, no one is required to take their required minimum distribution from any retirement account. If you would otherwise have been required to take an RMD this year, skipping it for 2020 can lower your tax bill for this year, as distributions are taxable as ordinary income. For example, let’s say your 2020 RMD was $20,000. By not taking this distribution, you can cut your 2020 tax bill by $4,000 (assuming a 20% tax bracket). If you already took your 2020 RMD after Feb. 1, 2020, you have until July 15, 2020 to return it to your retirement account.
Other Retirement Account Distributions Permitted
If you are under 59 ½ and need to make a financial hardship withdrawal due to the pandemic, the normal 10% penalty is waived for distributions up to $100,000 and you are also able to spread the taxes from these distributions over three years. You are also able to put the funds back into the account within three years. This provision can be particularly helpful for people who have been laid off and do not have a lot of funds available outside of retirement accounts to sustain them until they find work.
Cash Payments to Individuals
These one-time, non-taxable payments are made directly from the U.S. Treasury to individuals, subject to these income limits: under $75K (single), $112K (head of household) and $150K (married). Single or head of household taxpayers will receive $1,200. Married taxpayers will receive $2,400.
A modest but easy-to-use provision is the new deduction created for up to $300 of charitable donations. Taxpayers do not need to itemize to get this deduction, so this provision will be useful to any of the 95% of taxpayers that do not itemize and have made a donation in this time of need for our country. Also, there is no cap on the level of charitable deductions for 2020. The 2017 Tax Cuts and Jobs Act previously set the deduction cap at 60% of Adjusted Gross Income (AGI) but the CARES Act does away with the AGI limit for 2020.
This new law is broad and complex and provides relief to many parts of our economy. Here is a link to the legislation on the U.S. Treasury’s website:
Want an assessment of your financial situation and readiness for retirement? Just give us a call or send an email. We’ll be happy to have a look.
Peter Thoms, CFA
Jeff Rotherham, CFP
(This content is provided for educational and informational purposes only and should not be considered to be tax or investment advice. Individuals should consult their own tax and investment professionals regarding their own situations.)
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