Apart from stimulus checks, small business loans, and expanded unemployment, there are a few “hidden gems” sprinkled throughout the CARES Act that are worth noting.
The Tax Cuts and Jobs Act enacted a few years ago increased standard deductions making the need to itemize less likely for most people. This helped simplify tax prep, including wiping away the need to keep receipts for charitable donations. However, the CARES Act is allowing an above line deduction of up to $300 for 2020 – so keep your receipts!
Required Minimum Distributions
Year end 2019 was all abuzz about Required Minimum Distributions (RMDs) being delayed from age 70.5 to age 72 under the recently passed SECURE Act. In addition, beneficiaries of pre-tax retirement accounts needed to expedite distributions to be paid out within 10 years of inheritance, disallowing the long favored life-time distribution (aka Stretch IRA strategy). While that’s all still true, it’s been put on pause for 2020 due to the corona virus.
New options: The CARES Act has completely suspended the requirement to take RMDs for 2020, which includes beneficiaries. In addition, if you’ve already taken all or part of your RMD, you can refund it to the account.
Better Access to Retirement Accounts
I’ve seen my share of new clients in their 40s and 50s who have done a fantastic job accumulating wealth in their employer retirement account and home equity. They easily pay for expenses with net income. That’s great until the income shuts off and you have little to no cash reserve or brokerage account to tap into. I usually describe the situation as being “illiquid,” one client jokingly responded that he’s then “completely arid.” If your only option is to withdraw from your retirement account prior to age 59.5 it’s so far meant being hit with a 10% penalty on gains + a mandated federal tax withholding (and don’t forget you’ll still owe state taxes). Yes, there are exceptions for hardship, but qualifying for that is easier said than done and the amount allowed is usually not enough.
Under the CARES Act, you’ll now be able to take a distribution from you retirement account, up to $100,000, without immediate tax withholdings and waived penalty to help cover expenses. You’ll then be able to pay the tax over the course of 3 years or pay back the account in full within that time before it’s considered a true distribution.
Loans against retirement accounts have also been increased from $50,000 or 50% account balance to $100,000 or 100% account balance (whichever is less in either case.) Read more about the rules of 401(k) loans here.
HSA Account Qualified Expenses have been Expanded
You may remember the good ole’ days of being able to buy over-the-counter medicine, vitamins, and miscellaneous home remedy products using tax-free dollars from a flex or health savings account. That all went away under the Affordable Care Act, which limited qualified distributions. However, under The Cares Act you may now tap the tax-free dollars in your flex or health savings accounts to purchase things like Tylenol and even menstrual products!
You can Carry BACK Net Operating Losses
For as long as I can remember we’ve been able to carry-FORWARD losses to save on taxes due toward future profit. But under the CARES Act, we’re now able to amend previous returns to carry-BACK losses. Net Operating Losses (NOLs) that are generated in tax years 2018, 2019, and 2020 can now be carried back up to five years. This will allow for an immediate claim for a refund for taxpayers who had taxable income during the carry-back time period.
Controversy: Some feel this is meant to only benefit the wealthy. However, keep in mind it means the taxpayer did in fact incur a loss, for example, let’s say $100,000. Let’s say in another tax year, whether in the past or future, there was a $500,000 profit. The loss will bring down the taxable income to $400,000, meaning they simply don’t pay taxes on $100,000. Let’s say the effective tax is 30%. That means they’re saving $30,000 in taxes. They aren’t receiving a tax credit of $100,000, meaning the loss sustained is far greater than the benefit received ($30,000 < $100,000.)
This provision should also be of great assistance to small businesses who will not be able to recover from this shut-down and claim losses against future returns. Being able to carry-back the losses allows them to claim the loss against prior year profits and potentially get refund dollars in hand NOW when it’s needed most.