Fiscal Stimulus Package: What’s in It for You?

As governments began to close non-essential businesses and issue “stay at home” orders back in March, you were probably wondering…

How will families survive financially?

Part of the answer is the government stimulus package, also known as the CARES Act (which stands for Coronavirus Act, Relief, and Economic Security Act). It was signed into law on Friday, March 28 to give Americans a financial bridge until things get back to normal.

Here’s how the CARES Act may affect your finances.

Tax filing and payment deadline postponed

When it comes to Form 1040 income tax returns … April 15th no more! The deadline for filing tax returns has been moved to July 15. There is no need to file an extension. However, if you expect a refund, filing your 2019 taxes as soon as possible will allow you to get that refund quicker.

Rebate checks are coming

As a part of the stimulus package, the CARES Act provides for “Recovery Rebates” for individuals and families. This is probably the most anticipated part of the Act because some people will receive money in the mail or via direct deposit.

One confusing thing about “Recovery Rebates” is that they are calculated based on the taxpayer’s 2018 or 2019 income tax return — but they are treated as a rebate against the 2020 income tax return.

Here’s how it works. The government will use 2018 or 2019 numbers to cut the initial checks. When 2020 numbers become available, they will re-do the math. As a result, some people may get a smaller rebate now (or no rebate at all) and another rebate later when the 2020 return shows that they “deserved” it.

In good news, if your 2020 tax return shows that you should have received less than what you actually received, the government won’t ask you to give the excess money back. Once you receive the rebate check, you get to keep it.

How exactly will you get your rebate? It depends. Those who receive Social Security benefits, and those who had a refund in 2018 and opted to have it direct-deposited, will get the rebate through direct deposit into the same account. The rest should look for a check in the mail.

RMDs waived in 2020

If you were previously expected to take Required Minimum Distributions (or RMDs) from your traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), or 457(b) plans, those RMDs have been waived for 2020. If you don’t need this money, you can leave it in the account!

In an interesting twist, the CARES Act also eliminated any RMDs that would need to be taken during 2020. So, if you turned 70 ½ in 2019 and opted to push your first distribution until April 2020, you would normally have to take two RMDs in 2020. This year, because of the extraordinary circumstances, you get a pass on both.

One more note on the RMDs: If you are not a procrastinator and have already taken your RMDs for 2020, you may be able to return them. Work with your CPA, since the steps will be different depending on when you took the distribution.

IRA contribution deadline extended

The deadline to contribute to your Individual Retirement Account or IRA has been extended to match the Federal tax filing deadline (July 15). That means you have until July 15 to make your 2019 contribution.

No “early withdrawal” penalty

Typically, it’s best to contribute to your retirement savings accounts and not touch that money until retirement. However, these are not ideal times. Many families have suffered financial hardship because of the Coronavirus. Some have been sick. Others have been laid off or furloughed, experienced work hour reductions, or were unable to work because they did not have access to childcare.

If that is your situation, you may qualify for a Coronavirus-Related Distribution from an IRA or a 401(k).

That means you are exempt from paying the 10% early withdrawal penalty. There would not be the mandatory 20% Federal withholding, and you would be eligible to repay the distribution back into the retirement savings account over the next 3 years. By default, any income from the early withdrawal would be split evenly among 2020, 2021, and 2022. However, you could elect to include the whole distribution in your 2020 income (which may make sense if your overall income for the year is lower than usual). Before you make this election, talk with your tax CPA.

In closing, keep in mind that the CARES Act is a historic emergency relief program. As any change in tax law can potentially create planning opportunities, CPAs and financial planners will spend the coming months pouring over the Act. So, work with your CPA to fully understand how the new law will affect you.