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The Pro's and Con's of the COVID-19 CARES Act

With the passing of the CARES Act, many Americans were provided with relief from the financial impact of the COVID-19 pandemic. Let’s review some of the more important parts of this legislation as well as some of the hidden problems that may affect many of us if we are not prepared.


President Trump signs the CARES Act into law

Stimulus Checks

Within this act was a one-time payout to Americans officially called Economic Impact Payments or, the stimulus check. For single filers, the maximum payout is $1200 and those filing jointly receive as much as $2400. The payout is based on adjusted gross income topping out at $75,000 for single filers, $112,500 for those filing as head of households, and $150,000 for married couples.


If you have qualifying children, ages 16 and under, this can add an additional $500 per child. The payments will go into a direct deposit account that the IRS has on file or there is an option of going onto the IRS website and putting in your direct deposit information. For those without an account, paper checks will be issued, but that could take months.


For social security recipients, including those receiving SSDI and SSI, they will also receive payments the same way they now get their benefits, either through bank accounts or a Direct Express card.


When it comes to these payments, not everyone will qualify. High earners, dependents aged 17 and older (including senior citizens), and non-citizens are not eligible. High earners are those with adjusted gross incomes of $99,000 for single filers, $198,000 for married couples and $136,500 for head-of-household filers.


There are some pitfalls in the stimulus payout

Those who owe student loans and have defaulted on them can still get the money because the wording of the legislation disallows federal and state debt collectors from seizing this money. However, if you are in arrears for child support, this money could be confiscated to offset the arrearage. Private debt collectors and banks may also go after this money since they are not bound by the same rules that are in place for federal or state collectors.


When it comes to income tax, this payment is not taxable and was set up as an advance tax credit for Americans.


Finally, as with all things, it seems scammers have their greedy hands out looking for ways to separate you from your money. Also be aware that when the paper checks start going out, stealing from your mailbox will be a possibility.


Unemployment

While the stimulus payments are not taxable, unemployment benefits are. And that extra $600 weekly that approved beneficiaries receive on top of the normal insurance check can add up quickly and be a rude awakening come the 2020 tax filing season.


So let’s take a look at how impactful this can be. A single person being laid off due to the coronavirus is approved for a benefit of $450 a week. Now, add to that the $600 that the CARES Act allocates that extends for 17 weeks based on the virus shutdown. If taxes are not paid, this could be quite an expense when returning to work and filing your annual tax return.


The way to keep this from happening is by checking off that box that allows for the deduction of federal and state tax. It’s very tempting to opt-out of having this money taxed given the situation, but as things return to some sense of normalcy, the bill will come due. The reality is, pay now or pay later.


Click on the photo below for a quick income tax calculator to determine how much you need to put aside for taxes should you choose not to have the unemployment checks taxed.


Retirement Accounts and IRA Required Minimum Distributions

A required minimum distribution (RMD) is the amount of money that must be withdrawn from a traditional, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified plan participants of retirement age. An RMD acts as a safeguard against people using a retirement account to avoid paying taxes.


The CARES Act has suspended required minimum distributions from retirement accounts in 2020, however, there are some in Congress who are looking to extend this in the next round of legislation that is being proposed. The point is to give those accounts more time to recover from the stock market downturns, and retirees who can afford to leave them alone get the tax break of not being taxed on mandatory withdrawals.


The law also temporarily loosens the rules on hardship distributions from retirement accounts, giving people affected by the crisis access of up to $100,000 of their retirement savings without the usual 10% penalty.

The RMD changes are for 2020 only

The law also doubles the amount 401(k) participants can take in loans from an account for the next six months to the lower of $100,000 or 100% of the account balance. Once again, this is a time-limited change but future legislation could change this depending on the economic environment and how soon we recover from this pandemic.


Remember, IRAs don’t permit loans.


Health Savings Accounts

Under the Affordable Care Act, Americans could use their HSAs and FSAs to pay for most medical services. But this only applied to prescription medication. They couldn’t use the tax benefit for over-the-counter products. That has changed with the coronavirus. Now, people can use their HSAs or FSAs to buy menstrual products and over-the-counter medications.


The coronavirus led Congress to permanently overturn the Obamacare restriction on over-the-counter medications. But some CARES Act reforms could vanish once the pandemic ends. The law only temporarily allows insurers and employers to cover telemedicine if employees haven’t met their deductibles.

Student Loans

The CARES Act expands a tax code provision that allows employers to contribute tax-free, tuition assistance to now provide temporary assistance with student loans. From March 27, 2020, through December 31, 2020, employers may reimburse employees up to $5,250 for loan repayment assistance or other education-assistance payments.


The CARES Act also offers relief for most federal student loan borrowers (including those who have direct loans, Perkins loans, and Federal Family Education Loans owned by the U.S. Department of Education) by automatically suspending monthly payments from March 13 to September 30, 2020. While loan payments are suspended, interest will not accrue. The CARES Act relief does not apply to private student loans.


The CARES Act was the initial legislation passed by Congress to deal with the economics of this pandemic. On Friday, the President signed legislation providing an additional $484 billion to replenish the popular small business lending program and support hospitals and COVID-19 testing. Congress is also eyeing another large financial relief bailout in the future. So given that, the items we discussed above may be subject to change or have additional benefits added to them. Stay tuned.


Remember our healthcare heroes!



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