Hello everyone! I hope you are doing well and are staying safe and healthy. These are certainly interesting and trying times in which we are living, and I hope that you are all in good spirits and health.
I wanted to reach out to you to provide some helpful information regarding some of the numerous measures passed by the government so far in 2020 aimed at providing financial relief and stimulating the economy as we navigate through these turbulent times resulting from COVID-19. There do not seem to be signs of this slowing down any time soon either, as evidenced by executive actions by Donald Trump a week ago as Congress continues to be unable to come together on a second Stimulus package.
Given the multitude of government actions over the last few months, it has likely been difficult to keep up with all the changes and how each of them impacts your personal situation. My goal in this article is to review these various actions and highlight some of the new rules that have resulted from the government’s response to the pandemic.
So, technically this Act, which stands for Setting Every Community Up for Retirement Enhancement, does not belong in this article as it was passed on December 20, 2019- well before most of the world had even heard the term “Coronavirus”. However, I wanted to include it because some of the new rules initiated by this Act, which went into effect on January 1st of this year and is considered the biggest legislative change to the retirement system since the Pension Protection Act in 2006, will have a broad impact. While there are close to 30 new provisions as part of this Act, here are some of the highlights:
- The required minimum distribution age increased to 72 (up from 70 ½). This allows people to keep their money in retirement accounts a little longer, which allows those funds to keep (hypothetically) growing tax deferred. (*These new rules are in effect for those that turn 70 ½ in 2020 or later- otherwise, the old rules still apply.
- Contributions to Individual Retirement Accounts are now allowed past age 70 ½. Previously, you were only allowed to make Traditional IRA contributions if you were under 70 ½. But now that age restriction has been repealed, allowing people to continue contributing to these retirement vehicles, which offer tax savings and deferral, as long as they are still working.
- Certain qualifying part-time workers are now eligible to participate in 401k plans. Previously, those who worked less than 1000 hours in a year were unable to participate in the company’s 401k plan. But a new provision under the Act allows workers over 21 years of age who work at least 500 hours in 3 consecutive years to contribute to the company plan.
- New parents are now able to take penalty-free withdrawals from their 401k or IRA. While there were already certain exceptions to the 10% early withdrawal penalty, the SECURE act added an exemption for withdrawals of up to $5,000 after the birth or adoption of a child.
- IRA beneficiaries, with some exceptions, can no longer “stretch” distributions over their lifetime. Under the previous law, people who inherited IRAs (or 401ks) could spread the distributions over their life expectancy, but that is no longer the case. Instead, distributions must now be taken within 10 years (unless you are a surviving spouse, minor child, or one of few other types of qualifying individuals). This applies to the beneficiaries of all retirement account owners who pass away on or after January 1, 2020.
As I mentioned, there are other provisions contained in the SECURE Act, but these are the some of the key features, mainly aimed at increasing opportunities and flexibility for retirement savings. The removal of the IRA “stretch” provisions for beneficiaries may not be a welcome addition to the Act by most people, but overall, the goal was to improve retirement savings and increase access to company retirement plans. A lot of the changes were relatively modest, but hopefully overall the SECURE Act was a step in the right direction.
On March 27th, 2020, Congress enacted – and the President signed into law - the most significant piece of legislation aimed at providing relief from the economic impact of COVID-19 to individuals, businesses, and other organizations. This $2 trillion package was named the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The scope of this Act is extremely vast and detailed – far too much to cover in this article - but I want to highlight some of the more significant aspects of this legislation. While some of the actions were aimed at businesses, such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDLs), there were many components that focused on relief for individuals. I would like to summarize a number of those for you here:
This is perhaps the most well-known provision in the CARES Act, as a large portion of Americans qualified for - and hopefully already received - an economic relief payment based on certain income limits and size of your household. The basic parameters were this:
- Subject to income limits, taxpayers received $1,200 each ($2,400 if filing jointly) plus $500 for each dependent child under the age of 17.
- Any income above these thresholds caused the Recovery Rebate Payment to phase out by $5 for every $100 of additional income above these limits:
- $150,000 for Married Filing Jointly
- $112,500 for Head of Household
- $75,000 for all other taxpayers (Single, Married Filing Separately, Qualifying Widow(er))
Depending on when you filed your 2019 tax return, the IRS either used your 2018 or 2019 return to determine eligibility. It is also important to note that this stimulus payment was essentially an advance for a tax credit on the 2020 tax return. So, if you were not eligible to receive this rebate this past year, you may qualify for it when you file your 2020 return.
Also, if you feel that you were eligible for this economic relief payment and still have not received a check/electronic payment, please let me know and I can help you resolve the issue.
Special Retirement Plan Relief
Recognizing that many people would have limited access to essential funds and need to tap into other resources, Congress included provisions to ease adverse consequences of withdrawing from your retirement accounts.
For 2020, qualifying individuals can take a distribution from an eligible retirement plan (such as an IRA, 401k, or 403b) of up to a total limit of $100,000. While a 10% penalty usually applies to early withdrawals from retirement plans, that would be waived for this type of distribution. Additionally, the income from this distribution can be spread out over a three-year period. You also would have the option of re-contributing the amount of the distribution to your retirement plan within three years.
It’s important to note that, in order to qualify for this type of retirement plan distribution, you need to meet one of the following conditions:
- You, your spouse, or your dependent is diagnosed with COVID-19
- You experience adverse financial consequences from being quarantined, furloughed, laid off, having your work hours reduced, being unable to work because of lack of childcare, or closing or reducing hours of a business that you own or operate.
Waiver of 2020 Required Minimum Distributions
As I discussed earlier in the article, required minimum distributions (RMDs) used to kick in at age 70 ½, but under the SECURE Act, this was delayed until age 72. However, under the CARES Act, for 2020, no one must take a minimum distribution from their retirement account. They have been waived for this year. Now, you’re still able to take money from your retirement if you so choose, but if you prefer to keep the funds in the account, you can continue to do so for all of 2020.
Since this Act was not passed until March 27th of this year, and thus the RMD rule was still in place prior to this date, many people may have already taken either a portion of or their entire RMD for 2020. For those that did so and would rather have left their money in their retirement plan, they can still roll those funds back into a retirement account, if it is done by August 31, 2020. (*if you had taxes withheld from these distributions, they can be applied against other income in 2020 or refunded to you when you file your 2020 tax return).
In an effort to provide an extra tax benefit, Congress included a measure to allow taxpayers to deduct up to $300 in donations to qualified charities, even if you don’t itemize your deductions. In previous years, the only way to deduct charitable contributions was to itemize your deductions (medical expenses, state income and real estate taxes, mortgage interest, etc.). But for this year, you could be eligible for this separate deduction if you donate to charity. It is not a large amount but could provide at least some benefit to taxpayers when they file their 2020 returns.
One other provision related to charitable contributions is a waiver of the income limitations for donations to qualified charities. Previously, the maximum amount of charitable donations you could deduct was 60% of your income. However, under the CARES Act, you can get a Federal income tax deduction for charitable contributions of up to 100% of your income made directly to qualifying organizations.
The last highlight of the CARES Act that I would like to mention relates to changes to Unemployment Assistance. Since COVID-19 decimated the American workforce as businesses were forced to shut down or significantly cut their number of employees, Congress included several measures that enhanced benefits for those unable to work because of the virus.
For starters, people who were self-employed or independent contractors previously were not eligible for unemployment assistance. Under the CARES Act, benefits were now available for this type of worker.
Additionally, anyone receiving unemployment benefits through their respective state would be eligible for an additional $600 per week for up to four months. Unfortunately, this extra payment amount expired on July 31st of this year. And without any additional measures passed, the loss of this additional weekly benefit has a tremendously negative impact on people that have been unable to return to the workforce.
Which leads me to the next government action to discuss…
Trump’s Recent Executive Order/Memorandums (August 8th)
Since the House and the Senate have not been able to agree on a second stimulus package- House Democrats are proposing the HEROES Act, which would cost about $3 trillion, and the Senate Republicans are proposing the $1 trillion HEALS Act – President Trump signed Executive Orders (well, one order and technically three “memorandums”) on August 8th that covers four distinct areas. Before discussing these, it is important to note that there is some disagreement on the enforceability and efficacy of some of these orders. But I still feel it is important to address them as they stand now:
Extension of Unemployment Benefits
This order extended unemployment benefits that expired on July 31st (as mentioned above) for an additional four months but reduced the weekly amount from $600 to $400. The idea is that the federal government will pay 75% of the benefit ($300) and the state would pay the rest. There has already been a great deal of pushback at the state level as some governments are saying they do not have the resources to pay their 25%. Either way, it appears that even without the states contributing their portion, unemployed persons can still potentially receive the extra $300 per week.
Student Loan Payment Deferral
This measure is intended to waive student loan interest and defer payments until December 31st (currently, under the CARES Act, this provision is in place and set to expire September 30th).
Eviction Order Protections
This particular order was relatively unclear on whether or not eviction protection would continue as with the CARES Act. The order contains language saying that measures to prevent evictions would be considered, so it is a little up in the air as to what exactly this order means for those facing evictions.
Payroll Tax Deferral
Lastly, this particular action has been the most debated since these orders were initiated. The concept is the suspension of the Social Security payroll tax (6.2% of a worker’s pay) from September 1st through the end of the year. It would apply to workers earning less than $4,000 for any bi-weekly pay period.
One issue that could arise from this is that this would only be a payroll tax deferral- meaning that as it stands now, this amount would need to be repaid at the beginning of 2021. So, while it could put up to an additional $248 in someone’s paycheck every two weeks (if that worker’s income were $4,000 for a bi-weekly pay period), the savings would likely have to be repaid. For this reason, employers are having to determine if it’s prudent to not collect these payroll taxes if they’re just going to have to turnaround and withhold the difference when it comes time to repay the tax to the government.
So, at this point, it remains to be seen how impactful these executive actions will be. And the hope is that Congress can come to terms on a new stimulus deal that will provide economic relief to those that are struggling to make ends meet during these challenging times.
Whatever transpires, I will be sure to keep you informed. I hope that you have found this summary of the key economic changes that have taken place so far in 2020 helpful. If you have any questions, please do not hesitate to reach out by email or phone and I will gladly discuss any related matter with you.