Congress Passes Massive Stimulus Bill

On March 27^th, 2020, President Trump signed The Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The bill provides an estimated $2 Trillion (with a T) of economic relief to individuals, families, unemployed workers, small-business owners, retirees, and severely-damaged industries affected by the Novel Coronavirus and our stay-at-home mitigation efforts.  This edition of Setting Sail will break down the key provisions that are most likely to apply to our clients as well as other financial announcements that occurred independently of the CARES Act.

Direct Payments to Individuals and Families

One of the most well-known provisions in the CARES Act is the “Recovery Rebates For Individuals” or sometimes just referred to as “free cash.”  These payments are technically tax credits for your 2020 Federal income taxes but may be paid in advance.  The credit is $1,200 for adults and $500 for dependent children under the age of 17.  Dependent children 17 and up or dependent adults (such as an elderly parent who is claimed on their children’s tax return) are not eligible to receive either their own $1,200 credit or $500 for the heads of their household.

These recovery rebates are subject to income limits that start at $150,000 for married couples filing jointly, $112,500 for head of household filers, and $75,000 for all other filers.  The credit is reduced by 5% of their adjusted gross income (AGI) over the income limit.  For example, if a married couple with two young children has $160,000 of income, their maximum potential rebate will be $3,400, but this will be reduced by $500 (or 5% of the income over $150,000) to arrive at their actual rebate of $2,900.

But which tax year is the IRS using to determine an individual or family’s income?  Depending on the circumstances, it could be 2018, 2019, or even 2020!  The initial recovery rebates will be based on the most recent tax return filed.  Since the 2019 tax filing deadline has been pushed back to July 15^th, that might be your 2018 income taxes.  If your 2018 income was low enough to qualify, but your 2019 income will be higher, and that higher income will reduce or eliminate your rebate, you can wait to file your 2019 tax return until after the rebates have been disbursed.  Conversely, if your 2018 income was too high to qualify, but your 2019 was low enough to qualify, you should file your 2019 income taxes as soon as possible to receive the rebates this spring.  Even though this credit is a 2020 income tax credit, there won’t be a payback required if a taxpayer receives their credit this spring based on their 2018/2019 income while their 2020 income would have made them ineligible.

If you don’t receive a full rebate this spring, you will be able to claim it as a credit on your 2020 income taxes if you meet the income thresholds.  Unfortunately, this may be the way many Americans receive their rebate if they were above the income limits in 2018 and 2019 but will be below the income cap in 2020 because they lost their job.  These folks could really use these funds right now but will have to wait until next year to get their recovery rebate.  Taxpayers who don’t file a tax return because their income is too low also won’t be receiving a recovery rebate this spring and will have to file a 2020 tax return to get the credit.

Although these direct payments are mandated to be made as soon as possible, the timing will likely be sometime in May.  If you received an income tax refund in 2018/2019 via direct deposit, the IRS will use the bank account on file to distribute your rebate.  If not, they will mail a check to the last address on record.

Required Minimum Distributions (RMD) are Waived in 2020

A nice tax benefit for retirees with qualified retirement accounts is the suspension of the RMD requirement for 2020.  This applies to all retirement accounts that would otherwise have an RMD requirement, including inherited IRAs.  Of course, taking away the requirement to distribute a minimum amount does not mean that retirees are prohibited from taking retirement account distributions. They are welcome to distribute what they would like to.  However, this suspension does create some unique planning opportunities.

Qualified Charitable Distributions are still allowable in 2020.  For Traditional IRA owners who are over age 70 ½, the option of donating IRA funds directly to qualified charities remains a powerful tool in reducing taxable income.  The only difference this year is these QCDs will not count towards their RMD because, well, there is no RMD requirement this year.

Roth conversions are much easier for retirees without the RMD requirement.  IRA owners who are subject to RMD rules must satisfy their RMD requirement first before they can make Traditional IRA to Roth IRA conversions.  Since the RMD has been suspended in 2020, they are free to move money into their Roth IRAs if they choose to.  Taxpayers in lower tax brackets should consider increasing their income to take advantage of historically low tax rates.  In addition, Roth conversions can be a great tool to use in a down market.  This gives IRA owners the option of converting while account levels are lower and allowing the potential recovery to occur in their Roth IRAs where gains are generally tax-free.

For those who have already taken Traditional IRA distributions in 2020, you may be able to return your withdrawals and the tax consequences that come with them.  IRA owners can bring back the amount of the distribution within 60 days and identify these contributions as a rollover, which effectively cancels out the original distribution.  This can only be done once per year, so it won’t be an option if you have made another IRA rollover within the last 365 days. Unfortunately, inherited IRA owners do not have this option.

Coronavirus-Related Retirement Account Distributions

The CARES Act includes a provision that treats distributions from IRA and employer-sponsored retirement plans more generously. This is available up to $100,000 of distributions in 2020 for individuals who have been impacted by the Coronavirus because they:

• Have been diagnosed with COVID-19

• Have a spouse or dependent who has been diagnosed with COVID-19

• Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease

• Are unable to work because they lack childcare as a result of the disease

• Own a business that has closed or operate under reduced hours because of the disease; or

• Have experienced adverse financial consequences due to other COVID-19-related factors to be specified in future IRS guidance.

Given the laundry list of potential individuals who may qualify for relief under this provision, it seems rather clear that Congressional intent was to make this provision broadly available. The IRS will likely operate in- kind, and take a liberal view of who has been impacted by the Coronavirus enough to qualify for a Coronavirus-Related Distribution.

There are several potential tax benefits associated with Coronavirus-Related Distributions. These include:

1. Exempt From the 10% Penalty – Individuals under the age of 59 ½ may access

   retirement funds without the standard penalty that would otherwise apply.

2. Not Subject to Mandatory Withholding Requirements – Typically, eligible rollover distributions from employer-sponsored retirement plans are subject to mandatory Federal withholding of at least 20%. Coronavirus-Related Distributions, however, are exempt from this requirement.

3. Eligible to be Repaid Over 3 Years– After an individual receives a Coronavirus-Related Distribution, they have up to three years to roll all or any portion of the distribution back into a retirement account. Furthermore, such repayment can be made via a single rollover, or multiple partial rollovers made during the three-year period. Finally, if distributions are rolled using this option, an amended return can (and should) be filed to claim a refund of any tax paid attributable to the rolled over amount.

4. Income May Be Spread Over 3 Years – By default, the income from a Coronavirus-Related Distribution is split evenly over 2020, 2021, and 2022. A taxpayer can, however, elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income. 

Tax Filing Deadline is Extended

A theme throughout March 2020 was that every event known to humankind was put on hold or canceled altogether.  Events as small as youth dance recitals to as large as March Madness and the Summer Olympic Games were affected.  Although taxpayers strongly preferred cancelling rather than postponing their 2019 income tax returns, the IRS extended the tax filing deadline from April 15^th to July 15^th.  That decision has some nuances that you should understand.

The tax due date has also been extended to July 15th.  Taxpayers are always welcome to file an extension to file their taxes, but the taxes themselves have remained due on April 15^th.   However, with this extension, the tax due date has also been extended to July 15^th, giving taxpayers extra time to complete their 2019 tax payment without penalty or interest.

State tax returns have also been extended in many, but not all, states.  Idaho has extended their tax filing and payment due date to June 15^th.  This presents an effective Federal tax filing due date of June 15^th for Idaho taxpayers since they will need to file their Federal tax return to complete their Idaho tax return.  However, they are welcome to pay their Idaho taxes by June 15^th and wait until July 15^th to pay their Federal taxes.

Tax returns are still being accepted and processed. If you are receiving a refund with your 2019 income returns, you are encouraged to file as soon as possible to receive your refund. 

Retirement contribution deadlines have also been extended.  The usual April 15^th deadline to fund IRA accounts for the prior year has also been extended to July 15^th.  This applies to Traditional IRAs, Roth IRAs, and Health Savings Accounts.  For many taxpayers, this should give them enough time to receive their direct payments from the CARES Act and use those funds to contribute to retirement accounts for 2019.

The 2020 Federal estimated tax schedule gets a twist this year.  The 1^st quarter estimated tax deadline of April 15^th has been rescheduled to July 15^th.  However, the 2^nd quarter deadline of June 15^th has not changed and now comes before the 1^st quarter payment.  This could only make sense to an IRS bureaucrat, but in any case, we get a little more time to make our first estimated tax payment for 2020.

A New Charitable Contribution Deduction for Taxpayers Who Don’t Itemize

With the changes made to the Federal tax code in the 2017 Tax Cuts and Jobs Act, many more Americans are claiming the standard deduction rather than itemizing their deductions.  This means that around 90% of taxpayers do not see a direct tax benefit from the charitable donations that they make. The CARES Act creates a new above-the-line or before AGI deduction of up to $300 for charitable contributions.  The contributions must be made in cash and may not be made to donor-advised funds or private foundations.  Taxpayers who itemize their deductions will not be able to take this deduction, but can use the traditional charitable contribution deduction. While the maximum limit of $300 is not particularly noteworthy, the number of taxpayers that will now be able to claim at least some benefit for their charitable endeavors is.