CARES Act Update
As COVID-19 has spread rapidly over the last months, governments across the globe have been quick to respond, passing new legislation and economic relief packages. Arguably the most notable intervention has come from the USA, which passed the largest economic stimulus package in US history, the Coronavirus Aid, Relief and Economic Security Act or CARES Act, on March 27th.
While the Act is still being rolled out, it includes a number of important provisions that impact American citizens and green card holders, including those living abroad. We here at Tanager wanted to distill a couple of the main issues from the CARES Act that affect our clients and their families.
It is a big piece of legislation, allocating $2.2 trillion in support to businesses and individuals. Rather than attempt to summarise the entire legislation we wanted to focus on three elements of the Act:
- Economic Impact Payments;
- Retirement Account Distributions;
- Charitable giving.
Economic Impact Payments
Perhaps the single item in the CARES Act that generated the most attention is the provision for money to be sent directly to taxpayers. You can check your eligibility here. The Treasury will deposit the payment directly into the bank account on file from your previous tax returns, so for most people the money will arrive automatically.
Based on their Adjusted Gross Income (AGI) each taxpayer will be eligible for $1,200 ($2,400 for married couples filing jointly), as well as an additional $500 per qualifying child. The payment is phased out by $5.00 for each $100 over certain thresholds and filing status:
- $75,000 (single filers),
- $150,000 (married filing jointly)
- $112,500 (heads of household).
Click here to go the Tax Foundation website get an indication of what you might receive.
According to a House Ways and Means Committee memo, check distribution could follow the timetable below:
- Week of April 13, 2020: 60 million checks distributed through direct deposit
- Week of May 4, 2020: The IRS will start sending paper stimulus checks.
- Each week thereafter: Approximately 5 million paper checks will be issued each week.
Retirement Account Distributions
Required Minimum Distributions (RMDs) for 2020 are now suspended. Please note this does not mean there will be required two distributions in 2021. The 2020 RMD has been fully waived. For clients that do not need distributions from their retirement accounts to meet living expenses, this waiver will allow their investment portfolio to remain in the market and potentially avoid having to sell to facilitate the withdrawal while values have dropped in value over the last two months.
In addition to the RMD waiver, there is also a waiver of the 10% early withdrawal penalty for 2020 on distributions up to $100,000. This waiver is for an individual or their spouse who is diagnosed with COVID-19 or if they experienced adverse financial consequences caused by the coronavirus, such as being laid off, having hours reduced, being quarantined or furloughed.
These changes are significant and present planning opportunities which can be of help for many of our clients who are already in retirement. Please contact your advisor to discuss what these changes mean for you and your family.
Local, national, and international charities are providing important parts of the response to COVID-19, which is why the CARES Act makes charitable giving more appealing to taxpayers.
For small contributions, the Act allows up to $300 to be deducted from each taxpayers’ tax return for cash contributions made to US charities. Normally, taxpayers would need to itemize their deductions in order to enjoy this tax benefit.
For those making larger gifts, individuals can deduct up to 100% of their US adjusted gross income (AGI), which is a significant increase from the normal 60% maximum deduction.
The ability to deduct donations up to 100% of income creates planning opportunities, which are unique to each family. Though tax benefits are not always the primary motivation in the decision to give, it is an opportunity not to be missed when filing your 2020 return.
US citizens abroad often find charitable contributions to US charities do not benefit from tax relief in their country of residence. With proper planning, a dual-qualified charity can be used to provide tax relief in both jurisdictions. Your advisor at Tanager can discuss strategies for how best to give to charity.