The Bottom Line: What the COVID-19 Stimulus Package Means for You

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Learn how the Coronavirus Aid, Relief and Economic Security (CARES) Act may affect your wealth planning.

In a welcome display of bipartisan action to bring legislative relief to individuals, families, businesses and communities in the midst of COVID-19, the Coronavirus Aid, Relief and Economic Security (CARES) Act has been enacted. This aid package, designed to address the medical and economic implications of the virus, is the largest economic stimulus package in U.S. history, allocating more than $2 trillion in an effort to assist healthcare providers, businesses and individuals.

Below are some key highlights of the Act that may impact your financial wealth planning and what each provision means for your bottom line.

Recovery Rebates for Individuals

A cornerstone of the aid package is an immediate rebate for individuals in the form of a refundable tax credit, meaning a check or direct deposit for qualifying individuals. The credit, up to $1,200 for an individual and $2,400 for a married couple, plus $500 for each qualifying child, begins to phase out at an adjusted gross income of $75,000 for an individual and $150,000 for a married couple. Payments are to be made as rapidly as possible and not after December 31, 2020. No action needs to be taken for a qualifying individual to receive a rebate. Notices confirming payment will be sent to an individual’s last known address.

The Bottom Line:

Recovery rebates will help relieve immediate financial hardship and provide peace of mind to the many qualifying individuals impacted by COVID-19. Even though some will not qualify, this will bring welcome relief for many people in your sphere of influence.

Retirement Account Distributions

Required minimum distributions from retirement accounts are waived for calendar year 2020.

The Bottom Line:

This is good news for individuals who do not rely on their required minimum distributions for daily living expenses and who otherwise may be required to liquidate retirement account assets in a down market to fund required minimum distributions. In addition, funds will remain in the retirement account for an additional year earning income and potentially growing/recovering tax-free.

Retirement Account Withdrawals

The penalty for early withdrawal from retirement accounts has been temporarily lifted for withdrawals up to $100,000 for any taxable year. Anyone with a coronavirus diagnosis, whose spouse or dependent is diagnosed, or who is quarantined, furloughed, laid off or has reduced hours or is unable to work due to lack of childcare qualifies for the distribution. Amounts distributed may be repaid at any time during the three years following the distribution. The tax on any taxable amount of a distribution may be spread over three years. In addition, the permitted loan amount from qualified employer plans is increased from $50,000 to $100,000. Outstanding loan repayments due before the end of 2020 are delayed for one year.

The Bottom Line:

This is relief, but it is relief with limitations. Certainly, if there is a pressing need for money to cover expenses, being able to withdraw from a retirement account without penalty is helpful. However, every dollar withdrawn will lose the benefit of tax-free income and growth, which will reduce the funds available for retirement when the time comes. Exercise caution in making early withdrawals and consider what other sources of funds are available before making a decision. If you proceed, make every effort to meet the three-year window for repayment.

Charitable Contribution Deduction

COVID-19 has placed a tremendous strain on communities, and many individuals are responding with charitable giving to organizations, providing much needed services and support. The Act provides for an “above the line” charitable deduction of up to $300 in addition to the standard deduction, which may be used even by taxpayers who do not itemize their deductions. This new provision is for tax years beginning in 2020. Contributions must be made in cash to qualifying charities; gifts to donor advised funds do not qualify.

The Bottom Line:

The increase in the standard deduction under the 2017 Tax Cuts and Jobs Act and the associated decrease in the number of taxpayers who itemize deductions (including charitable deductions) have been cited as the reason for a dip in charitable giving in 2018. (Figures for 2019 are not yet available.) While giving in times of need will continue independent of any tax benefit, this added deduction will bring much needed relief to the many organizations that depend on modest gifts from a large number of donors.

Charitable Contribution Deduction Limits

Charitable income tax deductions for individuals and corporations are subject to a host of limitations. For 2020 only, cash contributions to qualified charities will be disregarded for purposes of the adjusted gross income-based limitations on charitable deductions. Donor advised funds and supporting organizations do not qualify for this special treatment. For corporations, the 10% limitation is increased to 25%. In addition, the limitation on deductions for contributions of food inventory by businesses is increased from 15% to 25%.

The Bottom Line:

With a focus on meeting the immediate needs for cash and food donations, this temporary modification to the limits on certain charitable contributions is beneficial to donors, charitable organizations, and to their constituents in this time of heightened need.

Tax Filing and Payment Due Dates

The CARES Act does not include provisions related to postponed individual income tax payments. However, the Internal Revenue Service (IRS) has provided separate relief for individual Federal income, gift and generation-skipping transfer tax filings and payments originally due on April 15, 2020. The IRS also will allow additional time to make contributions to individual retirement accounts and health savings accounts. The extended deadline under the current guidance is July 15, 2020.

The Bottom Line:

Tax day is quickly approaching. Relief from the IRS is very specific, and the terms of any relief provided by the states varies. Now is the time to contact your tax advisor to determine what is due and when, and to coordinate any payment logistics with your wealth manager.

Tax Relief for Businesses and Loans for Small Businesses

Businesses of all sizes have been impacted by COVID-19, and business tax relief in the CARES Act is broad in scope. The legislation allocates over $377 billion in aid for the estimated 30 million small businesses in the United States. This relief comes mostly in the form of forgivable loans of up to $10 million each to encourage employee retention and payroll continuity. The Act also broadens the availability of economic injury disaster loans up to $2 million, and authorizes expedited advance payments of $10,000 to help maintain payroll, provide paid sick leave, and meet other expenses.

The Bottom Line:

These provisions are designed to minimize business interruption and secure employee well-being for U.S. workers who are employed by small businesses, work as independent contractors, or are self-employed (together, approximately 50% of the U.S. workforce). Legislation enacted in mid-March as the coronavirus continued to spread imposed a costly requirement on small businesses to offer two weeks of paid sick leave and family leave; the CARES Act seeks to assist those businesses and encourage employee retention despite the economic impact.


Conclusion

The CARES Act contains many additional provisions, including the expansion of unemployment insurance, relief for state and local governments and bailouts for certain industries. As the evolving impact of COVID-19 continues to emerge, Congress is likely to consider additional relief and stimulus packages to bolster and stabilize the economy. Your advisors at Northern Trust are here to help you navigate through this time of uncertainty with economic, financial and wealth planning guidance.

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.