How the CARES Act Has Impacted Financial and Charitable Opportunities

November 30, 2020


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How the CARES Act Has Impacted Financial and Charitable Opportunities

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27th, 2020. It included more than $2 trillion in economic relief for individuals and businesses facing the health and economic impacts of COVID-19. There are several financial benefits and tax incentives that many individuals haven’t taken advantage of this year. 

We have provided a breakdown of the four most significant provisions of the CARES Act and how they can alleviate economic stress during these times. 

In This Article

Read the full article, or click one of these links to skip to a section that is relevant to your situation.

 

Coronavirus-related Distributions from Retirement Accounts

Before the arrival of COVID-19, individuals who accessed funds or took out a distribution from an IRA before age 59 and a half would have to pay a 10% early withdrawal tax penalty in addition to ordinary income tax on the withdrawal. 

As a result of the CARES Act, qualified individuals are temporarily exempted from the 10% early withdrawal penalty and can withdraw up to $100,000. As an added benefit, instead of reporting the entire withdrawal as 2020 income, individuals can recognize the income across the next three years to lighten tax burdens. 

To qualify for these distributions, individuals must meet at least one of the following criteria: 

  • Diagnosed with COVID-19
  • Spouse or dependent was diagnosed with COVID-19
  • Faced adverse financial circumstances with employment due to mandatory quarantine, reduced hours, or layoffs 
  • Unable to return to work due to inability to access childcare
  • Business owners whose place of business had to close or reduce capacity

 

Example of a qualifier in this scenario: Martha is 45 years old. She works for a small business that had to shut down temporarily in April and has only recently opened back up at a limited capacity. Her husband was able to keep his job. Due to some non-virus related health issues with her father — who Martha’s family cares for –, they decided to take $30,000 out of her IRA to support them through the end of the year. Due to the implementation of the CARES Act, her family can forgo the early withdrawal penalty and claim only $10,000 of distribution in addition to their total income each year for the next three years.  

 

Suspension of Required Minimum Distributions from IRAs

According to the IRS, once an IRA owner reaches 72 years of age, they are required to take a set amount out of their account each year, known as a required minimum distribution (RMD). Simply put, the IRS requires this because it becomes taxable income. Due to this CARES Act provision, individuals over age 72 can forgo these RMDs in 2020 to preserve capital in their IRA account. 

 

Example of a qualifier in this scenario: Eddie is 75 years old. Each year, he receives enough from Social Security and his pension to support his desired lifestyle. However, each year he draws $20,000 out of his IRA to meet IRS requirements — on which Eddie must also pay taxes. This year, however, Eddie doesn’t have to take this distribution if he would prefer to keep the funds invested. 

 

Increased Loan Capacity from Employer-Sponsored Plans

Many employer-sponsored retirement plans, such as a 401k, give participants the ability to borrow against the value of their 401k as a loan and repay it through payroll contributions over the next three to five years. Essentially, you are paying yourself back at a specified interest rate, but as a result, you miss out on the account’s potential gain during the repayment period. 

Before the CARES Act, the maximum borrow limit was $50,000, assuming you had at least this amount of a vested balance in the account. In 2020, this number doubled, bringing the maximum loan value to $100,000. Borrowers also have an option to delay repayments for up to a year. 

While taking a loan out of your employer-sponsored plan isn’t something we encourage under normal circumstances, borrowing from yourself at a ~4% interest rate is a much better option than incurring credit card debt with a ~25% interest rate. 

 

Example of a qualifier in this scenario: Hank kept his job in 2020 but is caring for a close relative who was negatively impacted by COVID-19. As several unplanned expenses approach, Hank wants to be proactive by taking a $10,000 loan from his 401k. Hank decides to wait until 2022 to pay back this loan, as he wants to be financially cautious in the coming year. 

 

Increased Deductibility of Cash Contributions to Qualified Charities 

The COVID-19 virus seems to have impacted everyone this year but to varying degrees. For those who have a capacity for charitable giving, the CARES Act provided additional incentives for qualified donations this year. 

The CARES Act added a new $300 above-the-line deduction to a qualifying charity, as long as the donation is in cash and not applied towards a Donor Advised Fund. A Donor Advised Fund is like a charitable investment account, where donors can contribute cash, securities, or other investments and receive an immediate tax deduction. 

Secondly, the AGI (adjusted gross income) limit for cash contributions has been temporarily repealed. In the past, the limit was set at 60%, but this repeal essentially increases the limit to 100%. AGI limits affect many of the deductions and credits that taxpayers commonly take advantage of each year and are based on how much of your income is taxable. This facet of the CARES Act means individuals can get a charitable contribution deduction for the full amount of their AGI. 

Essentially, an individual can completely wipe out their 2020 tax liability with charitable contributions. As a bonus, if these contributions exceed 100% of the AGI limit, the excess can be carried forward as a charitable contribution for up to 5 years.

 

Example of a qualifier in this scenario: Amara was fortunate during the pandemic, as her job allowed her to continue to work remotely until they could reopen the office safely. She had investments and a savings account that supported her throughout the year. She was grateful and wanted to support her community through charitable giving. Amara’s taxable income is $40,000, which she was able to donate to qualifying charities in her community without paying any of that contribution in taxes. 

 

We haven’t seen many cases similar to Amara’s this year; however, many people are interested in donating non-cash assets, such as shares of stock or mutual funds. By donating shares of stock that have significantly increased in value, you pass a potential capital gains tax liability off of your plate.  Assuming that the charity is tax-exempt, it will not pay taxes on the sale of the stock, and you may be able to receive a tax deduction for the donation if you itemize.

 

What Should We Expect in 2021?

All of these CARES Act provisions are time-sensitive and currently only apply to the year 2020. Many individuals who have taken advantage of this year’s opportunities have been inquiring about what to expect next year with a potential new tax plan. 

Most importantly, any new tax legislation from an incoming administration is still in its infancy. While the current talking points indicate which direction a new tax policy may lead, it is still too early to make decisions based on parts of this legislation that may or may not pass. Based on current indications, a new tax bill is likely only to have significant impacts on those with very high incomes or very high net worth individuals. 

If a new bill passes, we recommend making an appointment with your estate planning attorney, financial advisor, and CPA to determine how the new legislation applies to you and what decisions you should make as a result. Make sure these individuals are collaborating on these decisions, so your financial decisions move in the same direction. 

There is no “one-size-fits-all” response to all of these 2020 CARES Act provisions. It is important to identify your financial needs and what opportunities are available to support you. If you have any questions, concerns, or would like more information on these possibilities, please contact us at (205) 313-9142 or info@oneascent.com. 

 

For those interested in retirement planning, investment management, or other ways to establish financial security, find out how OneAscent can serve you! We can help you identify what matters most to you and align your investments to reflect your values. Give us a call today! 

 

 

Disclosures:

  • This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  OneAscent can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
  • These materials contain references to hypothetical case studies.  These are presented for the purpose of demonstrating a concept or idea, and not intended to be interpreted as representing any specific person.  Such representations are not intended to substitute for individual investment advice, even if the case study appears to have similar characteristics.  
  • Information presented herein is based upon facts derived from publicly available information, and is also based on certain assumptions, including that there are no additional changes to current tax law, and that demographic information regarding retirement plan contributions also remains unchanged.

Past performance may not be representative of future results.  All investments are subject to loss.  Forecasts regarding the market or economy are subject to a wide range of possible outcomes.  The views presented in this market update may prove to be inaccurate for a variety of factors.  These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data.  Please contact your Financial Advisor in order to complete an updated risk assessment to ensure that your investment allocation is appropriate.   

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27th, 2020. It included more than $2 trillion in economic relief for individuals and businesses facing the health and economic impacts of COVID-19. There are several financial benefits and tax incentives that many individuals haven’t taken advantage of this year.\u00a0\n

We have provided a breakdown of the four most significant provisions of the CARES Act and how they can alleviate economic stress during these times.\u00a0\n

In This Article\n

Read the full article, or click one of these links to skip to a section that is relevant to your situation.\n

Past performance may not be representative of future results.  All investments are subject to loss.  Forecasts regarding the market or economy are subject to a wide range of possible outcomes.  The views presented in this market update may prove to be inaccurate for a variety of factors.  These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data.  Please contact your Financial Advisor in order to complete an updated risk assessment to ensure that your investment allocation is appropriate.