This weekend the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed into law, with the intention of providing relief to taxpayers affected by the coronavirus (COVID-19). I imagine this is but one of many stimulus/emergency relief efforts to come, and the details will undergo much scrutiny in the coming months.
This is a massive and wide-reaching law. I’ve done my best to summarize the parts that I think will have the greatest interest or impact to early retirees and aspiring early retirees, although it will affect nearly everyone.
Key provisions of the CARES Act include recovery refund checks (a front-loaded refundable tax credit), access to savings (penalty-free IRA withdrawals), and a massive expansion of unemployment benefits along with incentives for employers to retain employees. Additionally, there is a new above-the-line deduction for charitable donations.
Recovery Refund Checks
A core part of the CARES Act is a cash infusion to taxpayers in the amount of $1,200 per adult and $500 per child. The refund is phased out if your Adjusted Gross Income (AGI) exceeds a threshold ($75,000 for Single filers, $150,000 for Married filing Jointly, or $112,500 for Head of Household.)
Technically this is a non-taxable refundable tax credit on your 2020 return, but you receive the funds now (soon.) Payments will be direct deposited to your bank account on record or mailing to your tax filing address.
If the Treasury has processed your 2019 return (or will soon) then your 2019 AGI will determine the amount you receive now. If not, then the 2018 return will be used. If your 2020 income is lower, you may receive more in 2021 when filing your 2020 tax return.
There is no clawback mechanism (you will never need to pay it back) so if you would receive more under your 2018 return than your 2019 return, then it is best to wait until you receive your check before filing for 2019. (This is our situation.)
Interesting nuance: I believe children born in 2020 will qualify for the $500 child credit on the 2020 tax return (e.g. the yet-to-be-named Sir GCC, Esquire) even though their payment won’t be front-loaded. (I’m still figuring this out.)
How did Congress settle on $1,200 per adult? No idea, but for perspective it is roughly equal to 4 weeks of full-time pay for somebody earning the Federal minimum wage of $7.25/hour.
- Use our Recovery Refund Check Calculator to determine your own benefit.
Penalty-Free IRA Withdrawals
Normally withdrawals from an IRA are subject to a 10% penalty before age 59.5.
But if you’ve been “impacted by the coronavirus” you can make a coronavirus-related distribution of up to $100,000 without penalty.
Better, the tax burden on the withdrawal can be distributed over 3 years (2020, 2021, 2022.) And if you wish, you can repay the amount within 3 years and file an amended tax return for a refund of taxes paid.
“Impacted by” is fairly loosely defined – either you/spouse/dependent were diagnosed with COVID-19 or you experienced “adverse financial consequences” due to quarantine/layoffs/work hours reduced/etc…
This option could be useful for somebody looking for funds to bridge the gap between retirement and age 59.5, or where early withdrawals will help reduce future tax burden if your 401k is too big.
Deferred Self-Employment Taxes
Self-employed people are required to pay both the “employee” and “employer” portion of payroll taxes.
Use our Self-Employment Tax Calculator to estimate the impact.
With the CARES Act the employer portion for the remainder of 2020 can be deferred, with 50% due on Dec 31, 2021 and 50% due on Dec 31, 2022.
This can be a big help for cash flow. (For example, we paid $9,663 in SE taxes in 2018 – delaying payment of half as much wouldn’t be terrible.)
Of course, if circumstances mean that you have zero self-employment then this is of little help. But unemployment benefits have also been extended to the self-employed…
Paycheck Protection Program Loan and/or Pandemic Unemployment Assistance
Normally gig workers, contractors, and the self-employed are not eligible for unemployment benefits.
However, for those impacted by the coronavirus there are 2 avenues of support:
– Paycheck Protection Program Loan – borrow up to 2.5x your average monthly payroll costs (this included net earnings from self-employment.) These loans can be fully forgiven when used for approved expenses (payroll, business rent, utilities, employee health insurance, etc…)
Alas, this is not helpful for us – payroll costs shall not include “any compensation of an employee whose principal place of residence is outside of the United States”
– Pandemic Unemployment Assistance
Unemployment benefits through your State of residence, to compensate for loss of income due to the coronavirus
Above-the-Line Charitable Deductions
After the Tax Cuts and Jobs Act (2017) it became necessary to itemize deductions in order to get a tax benefit from charitable contributions.
Now, with the CARES Act, it is possible to deduct up to $300 of contributions per person made directly to a qualifying organization (no contributions to donor-advised funds) without itemizing.
The tax benefit to the donor is small, but hopefully encourages more people to give during these challenging times.
Ideas for Charitable Giving
Looking to make an impact by donating all or part of your Relief Payment while getting a tax deduction to boot? Here are some ideas:
Get Us PPE – help healthcare workers and front line fighters get the Personal Protective Equipment they need
Feeding America – their network of food banks is helping provide food security to people in need
Meals on Wheels – Seniors are particularly vulnerable to COVID-19. Help them get reliable meals without risking exposure.
Please share your own ideas in the comments.
References and Other resources:
Full text of the Coronavirus Aid, Relief, and Economic Security Act
COVID-19 Small Business Tax Relief – Evergreen Small Business
Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic – Kitces.com
Tax Aspects of the CARES Act – Forbes
What’s In It For You? $1,200 Checks, 13 Weeks Of Unemployment Payments And More – NPR
Where the money goes in the US Senate’s $2T coronavirus stimulus bill – reddit, beautiful chart
Our Recovery Refund Check Calculator – use to determine your own benefit
Summary
With large portions of the economy on hold, the CARES Act seems focused on helping individuals and businesses stay afloat until sufficient COVID-19 testing is in place. At that point we can take small steps towards normalcy. This will likely take months, so this may be just one of many stimulus efforts.
Key provisions of the CARES Act include recovery refund checks (a front-loaded refundable tax credit), access to savings (penalty-free IRA withdrawals), and a massive expansion of unemployment benefits along with incentives for employers to retain employees. Additionally, there is a new above-the-line deduction for charitable donations.
Most people will receive some amount of recovery refund in the coming weeks. Calculate your benefit here.
Hmm, that 401k disbursement could be a good reason to file as Married Filing Separately. Are there any provisions that would prevent one from putting some of that disbursement into another fund holding the same funds as the 401k had?
No restrictions. What is the scenario you are thinking of with married filing separately?
Wouldn’t it be that the spouse that is currently not working (but likely going back), can convert pretax dollars into Roth or Taxable investment accounts.
Hey Jeremy, thanks for your post but I thought you always had to itemize to deduct charitable contributions ? I know that since the new tax law went into effect the standard deduction went up making it harder for most to itemize.
The CARES Act allows a $300/person above-the-line deduction.
This is why developed countries are so attractive.
Have you seen details on unemployment benefits for self-employed? I’ve seen articles that it’s included in the act, but nothing laying out specifics of who qualifies. My business is way down right now but not completely zero. A small amount can be done as WFH. Trying to decide if I should shut down completely temporarily.
Also interested in this.
This is tricky because unemployment insurance varies by State. I tried to review the Washington State requirements, but their website says “reviewing the details now” so they are still figuring it out. They also have a Scenarios and Benefits Available table with a whole bunch of “case-by-case” indications, so it doesn’t seem to be black and white.
The text of the law states that unemployment benefits are available for “partial unemployment” so it may not be necessary to shut down completely (I think, but don’t know for certain.) I would reach out to your State’s unemployment office and try to get some guidance directly.
For the IRA withdrawal, does the income all get attributed to 2020, but the taxes can be spread 3 years, or can you spread the income across 3 years? I’m reading it as the former, but just want to be certain.
Also, for the charitable contributions, does per person include dependants in your family (kids), or just 2 spouses?
Thank you for your summary!
The income is spread over 3 years – “any amount required to be included in gross income for such taxable year shall be so included ratably over the 3-taxable-year period…” but you can also just include it all in year 1 (optional.)
The charitable deduction is per taxpayer so doesn’t include dependents/children.
Our AGI for 2018 is too high to qualify for the tax credit, but the one for 2019 would definitely qualify. Do you have a date by when we should submit our 2019 tax return if we want it to be taken into account? I’m trying to figure out if I should rush to submit it or if it’s already too late… Thanks Jeremy!
ASAP. Yes, rush.
Ultimately it is your 2020 income that matters, but if you want money now vs 12 months from now then you need to get your 2019 return submitted (and hope you get lucky.)
Thanks, Jeremy. One more clarification. I don’t expect to own any tax in FY 2020. If I don’t get the tax credit check this year, would I still be eligible to receive one in 2020, even though I should not own any tax to the IRS?
It’s a refundable tax credit, meaning even if you have a $0 tax burden the government will send you a check.
Another very useful post. Thanks, Jer.
My 24 yr old daughter had to leaver her job at a Taiwanese university and is back home with us here in the US. She had been working there for the last 6 months. Any idea whether she will qualify for unemployment?
Thanks.
Normally you need to have been working in your specific State to qualify, but there is a catch-all in the pandemic unemployment assistance text… so it looks like anybody impacted directly by coronavirus will qualify. So I think so, but please check with your State unemployment office.
Hey Jeremy, thanks for the quick rundown. What do you think about pulling 60k out of an IRA to pay off a mortgage? Avoiding the 10% and not paying taxes sounds like a great deal to me. Do you see any issues with this plan?
The withdrawal is still a taxable event
So if I understand correctly, if I pull out 60k then that will be added on top of my gross income and then be taxed at the end of the year. But if I pay back the full amount within three years there is a way to get back the money I paid in taxes right? But then the money I pay back will also be post tax money. Hmm, this is sounding less and less like a good deal. I just think it would be nice to kill my mortgage.
So I did some more digging and I think I have this figured out. If I were to take a distribution from my IRA I would not have to pay tax on it for 3 years or I could choose to spread the tax over all three years to reduce the burden. But I can also pay the money back within the three year period with post-tax money and my tax liability on the distribution would be null and void. So if I were to pull out 60k and pay off my mortgage which is at a 3.5% interest rate I would then have to pay back the 60k within 3 years to avoid the tax. But using post tax money would negate the 10% penalty savings provided by the CARES Act. But my income only falls in the 12% tax bracket because I utilize every pre-tax account possible. So if I pay back the distribution with money that I paid 12% tax, would that offset the savings? No 10% penalty and no tax liability on the distribution, I then pay off the Mortgage negating the 3.5% annualized compound interest. Does that mean I save 13.5% and spend 12% for a total savings of 1.5% over the next 3 Years? Instead of my IRA I wonder if I can use my 401k through my employer and pay back the distribution with pre-tax money and save even more? Man, my brain is starting to hurt.
umm.. I don’t really follow, but maybe an easier way to think about it this way:
Would you choose to NOT contribute to your IRA / 401k to pay more towards the mortgage? I believe you haven’t been doing this so the answer is no.
re: Pay off the mortgage or don’t pay off the mortgage – at 60k you are probably many years into the loan and payments are mostly principal anyway. Paying it off in that case is mostly just for the emotional boost or cash flow benefits.
Any idea how the advanced refundable tax credit will get accounted for on 2020 tax forms? i.e. receive $1200 credit in 2020, this can’t show up as a credit on 2020 tax form without a corresponding way to cancel it.
there is no corresponding way to cancel it
I don’t understand. If 2020 tax forms give a $1200 credit, wouldn’t people get both an early stimulus and a credit on their 2020 taxes, double-counting and getting two $1200 credits?
I haven’t seen a 2020 form… but there is no mention of repaying in the legislation, which you find in every other tax law that involves pre-payment (EITC, ACA subsidies, etc…)
I could certainly be wrong, but “no repayment” seems to be the consensus from everybody who has read the legal text. Take a look and let me know if you see different.
I’m not referring to having to pay back any advanced credit, but rather how will the advanced credit not show up as a tax credit on Form 1040 line 18 “Other payments and refundable credits” which would credit again when it shouldn’t as it’s already been received.
Weird, it’s easier to understand IRS’s language then this website
In that case, read the IRS website first, then read this one
You point out in your article that self-employed people are required to pay the employer portion of Social Security contribution in the “self-employment” tax. I am wondering if in the future, states might require self-employed people to also pay unemployment insurance. How much of a burden would that be?
Just looking at WA State, the average unemployment tax paid per employee is about $200 (but can be much higher.)
Thank you so much for the link to the paycheck protection program. My sister in Indiana just completed the express application for the program in just a few minutes. Have shared the link to your blog article on Facebook. Also, our son filed for partial unemployment in WA when his hours were cut due to COVID. Their website is overwhelmed right now.
Thanks again for all you do!
Very nice. The websites (and people) are going to be overwhelmed for awhile, many still trying to figure it out.
I keep seeing references to AGI and not MAGI. Does this mean they are not adding back FEIE to the AGI for advance credit stimulus calculations?
I don’t see any reference to MAGI, FEIE, or section 911 of the tax code in the CARES Act text. It just lists ineligible individuals as non-resident aliens, dependents, and estates/trusts.
Great information as always! But I couldn’t help but noticing you called the new baby Sir GCC. Does that mean it’s a boy?
Yes, it’s a boy!
Congratulations!
You mention up to $300 per person to a qualifying organization. Is that just any 501(c)3 organization? Also, married filing jointly means I can donate $600?
Yes, correct
Just stumbled across your website when researching filing income tax as an expat and have bookmarked it! Good stuff.
Any knowledge of whether unemployment benefits will potentially be available to expats who are independent contractors with US clients? I’m curious about residency requirements. This would be state-specific and I think that many states don’t have details on unemployment benefits due to COVID-19 for independent contractors.
I’m not sure yet how this is going to play out – normally unemployment benefits are run by the State and residency is required. But I don’t see a specific residency required in the CARES Act text for the $600/week Federal benefit. If you pay taxes in the state I would apply and see what they say.
Yeah, the states themselves don’t even know about logistics or eligibility requirements yet. So wait and see.
We’re in the same boat as you with 2019 income exceeding 2018, creating a benefit if I delay filing.
Also, we have a 20 year old daughter who was claimed as a dependent in 2018 but already filed on her own in 2019.
I need to look into the implication of this… if I delay filing, our benefit should be based on 2018 tax status (AGI + dependents) while her benefit may be based on 2019. Will we be double-dipping? (I’m not asking you to research / answer – just describing our unique situation)
lots of weird nuance to this – people get married, divorced, have kids, have kids leave for college, die, etc…
It’s poorly drafted imho
If you end up making over the income limit in 2020, but qualify based on AGI for 2019, will you be required to pay the money back?
No.
thanks Jeremy, thought I read that some where. good to know.
Possibly interesting loophole if not specifically addressed. Curious as to what you find out in researching.
So if I do the $100k withdrawal and I can do that in-kind with shares from a stock that is currently beaten down and I wait until it recovers, then I can return back the same $100K. Say my stock doubles I can return half the shares to the IRA and keep the rest in my taxable account and owe no taxes? Can I choose to no pay taxes now or ever and return at the end of the three years? I’ve also read that I have to pay some taxes over the three years and then amend the declaration once I return the money to the IRA
There isn’t a way to transfer shares out of or into an IRA. If your shares doubled after the withdrawal, you would probably owe some capital gains taxes trying to put the funds back in.
A cleaner way to do this is to just do Roth conversions.
I already did a Roth conversion. But I think this is better because I could actually use the money. And having the possibility of returning the money makes it almost too good to be true. I’ve never taken money from my IRA so if I can’t withdraw in-kind I could just sell $100000 in shares, withdraw that amount, buy the same shares with the taxable money, wait for the recover, then in three years sell $100000 in shares and return the initial withdrawal to my IRA. Doable?
PS if I manage to wait for a year and make the recovery all long term I may pay zero taxes
Thanks for including the donation idea for the get us PPE. Our hospitals have been doing what they can, but we are getting low. The patient influx is supposedly a few weeks out, so still time but still a big need.
Hi!
Thank you so much for the article. I want to know if I can take money out of my Roth Ira thereby avoiding the pre-payment penalty and my taxes have already been paid.
Or does this only apply to regular IRA’s??
Thanks so much!
Laurie
Earnings taken out of a Roth before age 59.5 are still taxed. It’s only the penalty that is waived.
(You can withdraw contributions anytime without taxes or penalty, completely independent of the CARES Act.)
Kind of lost and I might be in the same boat that we have tax free space left. I would still likely have state tax liability though I will take it
2 questions:
1. Paycheck Protection Program Loan – if I file taxes as a sole proprietorship (the only employee is me with 1099-MISC income), can i borrow (thru this program) money (quantify = net income from last year) from the bank that I don’t have to pay back because the government will pay the bank? It seems too good to be true.
2. IRA RMD Waiver – If someone already took their RMD in january, is there any way he can roll that over into a Roth IRA? (I think the answer is “no”, but i figure i’d ask).
Not certain why one aspect of this has not been talked about, at least in the financial forums: the ability to re-invest (move) withdrawn 401(k) assets into a separate IRA. This effectively allows for one to move assets from a workplace 401(k), with their notorious limitations in terms of funds and higher expense ratios, and transfer those funds into a lower cost institution of their choosing, such as Vanguard. That advantage can be huge. Am I missing something here?
I am considering to take the money out from my 401(k) to bridge the gap between possible retirement to 59 1/2. I would pay around 20% in tax now Which I may how to be anyway at retirement. But the capital gain tax would be lower than 20% when I Withdraw it. For example when I take hundred thousand I would pay 20,000 in tax or three years. Let’s say that hundred thousand is 300,000 at the time of withdrawal and the 200,000 increase it’s a capital gain And it’s taxed at a lower rate. But if I had chose to leave it in the 401(k) I might pay more tax withdrawal because the 401(k) may be too big at that time .