The global pandemic of Covid-19 is putting unprecedented pressure on our economy and on our finances. The CARES Act, passed by the Government at the end of March, has gone some way to addressing some of these issues but to most, the CARES Act is about stimulus checks and crisis loans for businesses.
But it’s much more than that – for example, it allows for changes to our retirement accounts and students loans. Let’s unpick how the CARES Act affects your finances.
The CARES Act and Retirement Accounts
There’s loads of changes here, including extended loans, early withdrawal arrangements and RMDs.
Firstly, if you, a spouse or a dependent have had Covid-19 or been financially impacted by it (through loss of work or collapse of a business), then you can take out up to $100,000 of your retirement savings. You won’t have to pay a penalty for early withdrawal or pay the mandatory withholding that this normally incurs.
Under the CARES Act, you’ll now report this income over the next three years, which softens the tax blow a bit. Plus if you’re able to, you can replace the distribution back into the account over the same 3-year period.
You can also take a loan of up to $100,000 from a 401k retirement plan, if there’s enough in there. You won’t have to pay this back – or any previous loan taken from a retirement plan – for up to a year.
Now, just because you can withdraw funds or take a loan from your 401k doesn’t necessarily mean you should. Weigh up the pros and cons here – our advice remains to leave it where it is, unless you have no alternative.
Now for RMDs – required minimum distributions. 2020 RMDs are waived, and no tax will be due on the money if it stays in the account. If you’d taken your 2020 RMD within the 60-day period before the CARES Act was passed, you may be able to return it, especially if you, a spouse or a partner had or were impacted by Covid-19.
The CARES Act and Charitable Donations
The CARES Act has made some changes to charitable donations as well. It now allows for non-itemized charitable deductions of up to $300 – but the donations have to be made to charities that fulfil certain criteria. Only donations of more than $300 will need to be itemized when you next file a tax return.
They’ve changed the limits on charitable donations too. Previously, individuals could only donate – and itemize – up to 60% of their AGI, but for 2020, that limit is completely lifted, meaning 100% of their AGI could be itemized as a charitable deduction. Corporations were previously bound by a 10% limit on charitable contributions, and that has now been increased to 25% of their taxable income.
The CARES Act and Mortgages or Rent
The CARES Act has elements in place to protect both people who pay rent or those with mortgages. If you are struggling to pay your mortgage, you’re now able to request a pause on making payments for up to 180 days. You won’t incur any charges or any extra interest over this period. You must contact your mortgage provider to ask for this to happen.
In addition, the CARES Act stops lenders from instigating a foreclosure against you or completing one if it’s already started, during the 60-day period following March 18, 2020. This may be extended, but we’ll need to pay close attention to any announcements.
For people living in rented properties, the CARES Act stops landlords from starting eviction proceedings until July 25, 2020. It doesn’t, however, mean that you can stop paying your rent. Anything you owe will still be due – it’s just that legal proceedings can’t be started.
The CARES Act and Student Loans
The CARES Act granted a suspension of payment of student loans. You may pause any payments until September 30, 2020 and no interest will be incurred during this period.
Additionally, your employer can now pay up to $5,250 of your student loan, tax free, before the end of 2020. This won’t count towards your wages or your taxable income.
The CARES Act and Small Businesses
Businesses are still able to apply for the Paycheck Protection Program (PPP) – a loan that’s fully forgivable if certain conditions are met – and the Economic Injury Disaster Loan (EIDL), which has an advance element which acts more like a grant. However, currently only agricultural businesses are able to apply for the EIDL.
The Small Business Administration (SBA) is accepting applications for Express Bridge Loans which give out loans of up to $25,000 with a maximum loan term of seven years. The business must have already been in operation on March 13, 2020 and fulfil the criteria of a small business.
Debt relief is also being provided by the SBA – principal, interest and fees of current loans will be paid and any SBA disaster loan payments are being automatically deferred until the end of 2020. Interest will still accrue, but you won’t have to make any payments.
What to Do Now
With the end of the pandemic not yet in sight and talks underway to initiate a second round of stimulus checks, some of the other allowances made in the CARES Act may be subject to change or to a renewal. It’s important to keep up to date to see how any changes might affect you, and to make sure you’re taking advantage of everything you can to help you and your finances get through this crisis and come out as healthy as possible on the other side.
If you need any help understanding how the CARES Act affects your finances, just give us a call. Together we can work out how to integrate the CARES Act into your financial plan.