Mike Earl, CFP®, CPWA®
On Friday afternoon, March 27, President Trump signed the $2 trillion “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) into law. You can read the full 880-page bill here.
Much of the news coverage around the CARES Act has applied to the “Recovery Rebates” (i.e. cash to taxpayers). According to estimates by the Tax Foundation, over 93% of taxpayers should receive some amount of rebate. The early indication is that Americans will begin receiving rebates in May.
While a massive stimulus package like this has many facets, we are laser-focused on how this bill will impact our clients. And more importantly, we are looking for planning opportunities that will improve our clients' long-term financial situation.
The biggest impact to our clients is that RMDs (Required Minimum Distributions) are suspended for 2020.
What does this mean to our clients?
- If a client does not need her 2020 RMD to fund her ongoing living expenses (i.e. she has other sources of income and assets to fund her living expenses), she can simply forgo her 2020 RMD.
- Skipping her 2020 RMD means her taxable income will be lower, which could lead to additional planning opportunities, such as Roth Conversions.
- Our clients know that Roth Conversions are the apple of our collective eye here at TWG. With tax rates that are low from a historical perspective, and market values in IRAs lower than they were not long ago, we have the perfect combination for Roth Conversions.
- It appears the law also applies to Inherited/Beneficiary IRA accounts, as reported by multiple news outlets. The initial bill itself does not seem to mention these types of accounts, so we are awaiting full clarity on this point.
- We will work with each client individually that is impacted by this law change – seeking to identify how we can leverage this law change into maximum long-term tax savings.
- This law change illustrates why we request a tax return from each client every year. We are able to do individualized tax planning for every single client.
Other changes that may impact some of our clients:
- Coronavirus-Related Distributions from retirement accounts for those younger than 59 ½. For an individual impacted by COVID-19, he can take up to $100,000 from a retirement account without the usual 10% penalty. Income taxes are still owed on any distributions, but those are eligible to be repaid over 3 years.
- Charitable Contribution Deduction – up to a $300 deduction on 2020 income taxes for a charitable contribution. This can be claimed as an above-the-line deduction for those who take the standard deduction. Your CPA will help make sure you take advantage of this on your 2020 income taxes.
Our friends over at kitces.com have posted the following chart as a helpful summary of the key provisions of the CARES Act:
We Are Here to Help
As always, we at The Wealth Group will cut through the noise to make sure our clients know what they need to know. In the weeks and months ahead, we will review how the CARES Act leads to planning opportunities for individual clients.