Coronavirus Stimulus Plan: What It Means to You
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 seems to have something for almost everyone. The bill is 335 pages long, so today’s article is a summary of the few provisions most likely to affect our clients, specifically recovery rebate checks, which 90% of American households will receive, and the waiver of RMDs (required minimum distributions) from retirement accounts.
Recovery Rebate Checks
Approximately ¼ ($500 billion) of the estimated $2 trillion stimulus package is allocated to rebate checks (Section 2201, Recovery Rebates For Individuals).
The CARES Act provides a refundable income tax credit against 2020 income. “Refundable” means you get the credit even if you did not owe or pay any income taxes. Single taxpayers will get $1,200 and couples who are married filing jointly will get $2,400. Each household will also receive an additional $500 per child under the age of 17 that they claim as a dependent on their tax-return.
Therefore, a married couple with 3 kids would get:
$2,400 + $500 + $500 +$500 = $3,900
Whereas a single taxpayer with one child would receive:
$1,200 + $500 = $1,700
Income Phase Outs:
As with most tax benefits, the amount of your rebate check will be partially or completely phased out if you earn too much money.
You will get your full rebate check if your AGI (Adjusted Gross Income) is below the following thresholds:
- Married Filing Jointly: $150,000
- Head of Household: $112,500
- Single: $75,000
The recovery rebate is reduced by 5% of the amount your income exceeds the AGI threshold.
Let’s look at an example: Suppose a married couple with three kids and eligible for a $3,900 rebate had AGI on their most recently filed tax return of $190,000. They are $40,000 above the threshold, so their rebate would be reduced by $2,000 ($40,000 x 5%). Therefore, they would receive $1,900 ($3,900 – $2,000)
The recovery rebate is an advance on your 2020 tax return, but the AGI used to calculate eligibility (i.e., phase out) is based on either your 2018 or 2019 tax return (whichever is the most recent the IRS has on file).
Some households may not qualify for a rebate because their AGI was too high in 2018/2019, but they would qualify based on 2020 income. Those folks will eventually get their rebate, but not until 2021 (when they file their 2020 tax return). Other items may change your eligible rebate amount such as changes that occurred in 2018/19 to your marital status or number of children. Any additional rebate amounts to which you become entitled will be made up for when you file your 2020 tax return.
The IRS says individuals who typically do not file a tax return will have to file in order to receive a payment, although on April 1st the IRS reversed course and stated that folks already receiving Social Security will not need to file a tax return just to receive the recovery rebate.
Rebates will begin to go out as early as the end of April and will be sent to the bank account where your Social Security check is direct deposited. If you are not receiving Social Security, you rebate check will be deposited into the bank account you have on file with the IRS from your most recent tax return. A physical check will only be mailed if the IRA and Social Security Administration do not have any banking information for you. Then the check will be mailed to the address of record on your most recent tax return.
One piece of good news is there is no claw backs of rebates. So you get to keep any rebate check received if you qualified based on your 2018/2019 AGI, but then earned too much in 2020. (See matrix below.)
Required Minimum Distributions Waived for 2020
The IRS has waived Required Minimum Distributions (RMDs) for 2020. This applies to all IRAs, as well as other types of qualified retirement plans such as 401(k), 403(b), and Governmental 457(b) plans. The waiver applies to both IRA owners as well as beneficiaries, who have inherited an IRA and are taking distributions under the (old) stretch IRA lifetime distribution rules or the (new) 10-year rule for designated beneficiaries.
There are also certain “non-designated” IRA beneficiaries, which means the beneficiary is not a person (e.g., a Trust). Those beneficiaries typically have 5 years to claim all of the money from an inherited IRA. Since they can skip 2020, a year gets added to the end, so the 5-year rule essentially becomes a 6-year rule.
What if you already took your 2020 RMD?
The good news is you may be able to return funds to your IRA if you’ve already taken all or part of your 2020 RMD. There are two ways this can work and one is time sensitive.
You can simply write a check back to your IRA for the funds distributed or transfer the money back into your IRA from another account as long as the money is returned within 60 days of the time it was first distributed from the IRA. This is known as a 60-day rollover.
You may still be able to return funds to your IRA, even if the 60-day time period has passed. However, you must meet one of the Coronavirus-Related Distribution criteria, which are:
- You, your spouse, or dependent have been diagnosed with COVID-19
- You have been financially impacted due to being quarantined, furloughed, laid off, or having reduced hours or earnings
- You are unable to work because you lack childcare
- You own a business that has closed or reduced hours
Sadly, beneficiaries of inherited IRAs who already took RMDs during 2020 are not able to return them.
Although RMDs are not required for 2020, IRA owners over the age of 70½ can still make a Qualified Charitable Distribution (QCD). A QCD is when funds are sent from your IRA custodian directly to the qualified charity. These distributions are not taxable (the equivalent of getting a tax-deduction) even if you are not itemizing your deductions (i.e., taking the standard deduction).
The CARES Act also specifies that any taxpayer can donate up to $300 to any 501(c)3 charity and deduct the contribution even if they are taking the standard deduction. The $300 charitable contribution does not need to come from an IRA.
The CARES Act contains many other provisions, especially related to unemployment coverage and loans to small businesses. Please consult your Surevest advisor with any questions and/or to cancel or return any RMDs for 2020.
I hope you are staying safe and sane. Have a great week!
Disclosure: This article is for informational purposes only and not meant as specific financial, investment or tax advice. Speak with your financial advisor before making any investments or acting on any topics discussed. Surevest Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Surevest Wealth Management and its representatives are properly licensed or exempt from licensure.