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Congress Enacts CARES Act, a $2 Trillion Bill to Rescue the Economy
Issues: Retirement Savings, Small-Medium Business Loans
Date: March 27, 2020
Action Taken: On March 27, 2020 the House of Representatives followed up on the Senate’s March 25 passage (by a 96 to 0 vote) of H.R.748, the CARES Act. The House passed the $2+ trillion bill by a voice vote. The bill’s goal is to rescue the economy and the millions of Americans struggling with the virtual nationwide shut-down of most commerce as a result of the coronavirus pandemic.
The law is stuffed with billions of dollars in loans, grants and direct payments to help individuals, people who have lost their jobs, small and medium sized businesses, big businesses especially hard hit by the coronavirus crisis, medical care providers, and states and localities battling the crisis. Below is a list of the CARES Act’s programs that may be of particular interest to NAIFA members and/or their clients.
- Paycheck Protection Program: Included in the CARES Act is the new, temporary paycheck protection program (PPP). The PPP is open to businesses with fewer than 500 employees. It is available to self-employed individuals so long as they have employees. It allows these businesses to borrow enough money to meet payroll, pay rent or mortgage and utilities, and cover pre-existing debt obligations during the “coverage period.” The coverage period is between Feb. 15, 2020 and April 30, 2020.
Borrowers apply for these loans through participating banks. They will pay no fees on these loans. If, a year later, the borrower has not reduced payroll, or reduced workers’ compensation by more than 25 percent, the loans will be forgiven. And, the forgiven loan amounts will not be includible in the borrower’s taxable income.
Eligible payroll expenses include wages and salaries, the amount of employer-paid group health insurance allocable to the program’s coverage period, retirement benefit costs for the coverage period, and payroll taxes payable for the applicable period. The amount of the loan that will be forgiven excludes salary amounts above $100,000, paid leave expenses covered by the government through the coronavirus-related paid leave requirements enacted in the Families First Coronavirus Response Act, and mortgage principal and other loan principal amounts.
Loan amounts that are not forgiven will be regular loans, with terms not to exceed 10 years and at interest rates that cannot exceed four percent. The program will be administered through the Small Business Administration (SBA), which will buy the forgiven loans from the banks that issue them (with the SBA paying all loan origination costs) when the banks certify, a year later, that the borrower has complied with the terms of loan forgiveness.
The CARES Act requires that guidance on how the program will work must be issued within 30 days of the law’s enactment (so, by around April 27).
- Retirement Savings: The CARES Act includes a number of retirement savings plan provisions. The Act:
- Suspends required minimum distributions for 2020.
- Allows plan participants to borrow all of their vested account balances, up to $100,000, and extends the time for repaying these loans.
- Waives the penalty tax on early withdrawals. Repayments of these withdrawals and loans (all of which must be coronavirus crisis-related) can be made within three years, and regular income tax on these withdrawals can be paid over a three-year period.
- Includes a rule that allows single employer defined benefit (DB) plan sponsors more time to make required contributions to their DB plans. Such payments can be deferred for a year, but interest on the required contributions for the deferred year must be paid.
- Employee Retention Tax Credit: H.R.748 also provides for a refundable 50 percent tax credit on the employer-paid portion of payroll taxes on wages up to $10,000 per employee. Excluded from this tax credit are payroll taxes that are covered under the new paid leave and/or paycheck protection program rules.
- Delay in Payment of Payroll Tax: The CARES Act also defers employers’ obligation to make Social Security tax payments through the end of 2020. This provision applies to self-employed persons, too. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
- Unemployment Compensation Benefits: The bill expands unemployment compensation, at the federal government’s expense. Per the bill, unemployment will be paid under the applicable state rules, but for four months, and with an additional federally-funded $600/week payment, when unemployment is as a result of the coronavirus crisis. It also expands eligibility for unemployment compensation, including to self-employed individuals.
- Direct Payments to Individuals: The bill creates a program under which Americans will receive cash payments directly from the Treasury. The amount of the payment is $1,200 per person ($2,400 for a married couple) with income under $75,000/year ($150,000 for a married couple or $112,500 for a head of household). An additional $500 will be paid for each dependent child. People with incomes above these levels will receive a reduced payment. The reduction is at the rate of $5 for every $100 by which their incomes exceed the limits. Payments are fully phased out at incomes of $99,000/single and $198,000/married. Any individual with a valid Social Security number is eligible for the payment. The payments will be by direct deposit for taxpayers who receive their tax refunds/Social Security payments via direct deposit. Others will get either checks or debit cards, a decision the government has not yet made.
The CARES Act also sets up a loan program for businesses (usually big businesses) especially hard-hit by the coronavirus crisis—e.g., airlines, travel and cruise industries. It provides billions of dollars to states to help them battle COVID-19, and more billions in aid to hospitals, doctors and other medical care providers who desperately need more supplies like masks, ventilators, and personal protective equipment. It provides for more time for payments on student loans and federally-backed mortgages. In short, it is pumping more than $2 trillion into an economy that has virtually ground to a halt under shelter-in-place and social distancing orders that have shuttered or stalled millions of businesses.
Next Steps: Congressional leaders are vowing that the CARES Act—the third coronavirus response law in the last month—will be followed by at least one and maybe more coronavirus response bills. The next one, said Speaker of the House Rep. Nancy Pelosi (D-CA), will be targeted at “recovery;” i.e., policies aimed at helping the economy create new well-paying jobs. Other Congressional leaders say if more help is needed by individuals or businesses, that help will be provided.
The timing on the next coronavirus response bill is unclear. Congress is likely to be out of session—joining the rest of America in working from home, sheltering in place and/or social distancing—until at least late April. Lawmakers do say, though, that they will come back into session before then should new emergency developments require it.
April 2021
Welcome to the craziness that is the 2020 tax filing season!
Because the IRS is still playing catch-up from last year, in addition to new tax laws passed in the middle of this year's tax filing season, the April 15 individual tax return deadline was moved to May 17. Read about how these new tax laws affect both your 2020 and 2021 tax returns.
Also read about extended tax breaks for businesses, along with creative ways to do something nice and unexpected for someone else.
Please call if you would like to discuss how this information could impact your situation. If you know someone who can benefit from this newsletter, feel free to send it to them.
Contents
ALERT! Late Tax Legislation Creating Havoc
Individual tax return deadline moved to May 17
Congress' recent move to retroactively make a portion of 2020 unemployment income tax-free is creating havoc during this year's tax filing season. Here is what you need to know.
Background
Unemployment compensation was received by millions of Americans during 2020 because of the pandemic. While unemployment income was necessary for many who lost a job, it’s also normally classified as taxable income to be reported on your tax return. Recently-passed legislation now makes the first $10,200 ($20,400 for married filing joint tax returns) of 2020 unemployment compensation tax-free. This tax-free unemployment income is available for those with adjusted gross income under $150,000.
The problem
The new legislation which contains this tax break didn’t become law until March of 2021, a full three months after the end of the tax year and after millions of Americans had already filed their 2020 tax return!
Understanding your situation
- If you’ve already filed your 2020 tax return: The IRS recently announced it is going to automatically process refunds for unemployment earnings that should not be taxed beginning in May. It will start with unmarried tax returns and finish with married filing joint tax returns that qualify to exclude unemployment income. This will avoid the need to file an amended tax return for most taxpayers unless the reduced income allows you to qualify for other tax benefits like the earned income tax credit. So there is no need for most taxpayers to file an amended tax return.
- If you HAVE NOT filed your 2020 tax return: The IRS now has guidance on how to report this tax break on your 2020 tax return if you have not already filed.
- Tax deadline moved to May 17. Because of all this havoc, the April 15 deadline for individual tax returns is now May 17. This extension applies only to Form 1040s. First quarter estimated tax payments for the 2021 tax year are still due by April 15.
Be assured you will be informed once the IRS issues further instruction on how to claim your tax break. In the meantime, enjoy the extra tax savings you’ll get sometime in the near future!
New Tax Breaks Benefit Millions
What you need to know
The recently-passed American Rescue Plan Act contains several tax breaks for you and your family. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.
Child tax credit (CTC)
- The CTC for 2021 increases from $2,000 to $3,000 for kids ages 6 to 17 and $3,600 for kids ages 5 and under.
- To receive the full tax credit your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household).
- If your income is above the aforementioned thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).
- You can receive up to 50% of your 2021 child tax credit in 6 monthly payments starting July 2021. The IRS is warning, however, that this July start date may be delayed because a computer system still has to be built to handle these monthly payments.
Child and dependent care credit (DCC)
If you and your spouse work and have children in daycare, or have an adult that you care for, you may be eligible for a larger tax credit in 2021.
- You can now spend up to $8,000 in dependent care expenses for one qualifying dependent and get a 50% tax credit. This results in a maximum credit of $4,000 (up from $1,050).
- If you have more than one qualifying dependent, you can spend up to $16,000 in dependent care expenses and get a 50% credit. This results in a maximum credit of $8,000 (up from $2,100).
- To receive the full tax credit, your adjusted gross income must not exceed $125,000.
- Dependents can include people of all ages, not just kids, as long as they meet the dependent qualifications.
Earned income tax credit
- If you’re a household with no kids, the maximum earned income tax credit increases from $543 to $1,502.
- More taxpayers qualify for the credit. The lower age limit for receiving the credit decreases from age 25 to age 19. The upper limit of 65 for receiving the credit is eliminated. There is no upper age limit for 2021.
- You may use either your 2019 income or your 2021 income when calculating your credit to obtain the maximum credit.
Stimulus checks
- A third round of stimulus payments in the amount of $1,400 is being sent to qualified taxpayers.
- The payment phases out for income over $75,000 for single taxpayers, $112,500 for head of household taxpayers and $150,000 for married couples.
Action to take
- Look for updates on the advance payments for the child tax credit. The IRS is sorting out how to get half of your child tax credit to you in 2021. Stay tuned for updates as to whether the payments will begin in July or if they will be delayed. You may also opt out of this early payment, but will need to wait for instructions on how to do so.
- Consider increasing dependent care expenses. Look ahead to the rest of 2021 and consider if you should increase your dependent care expenses to take advantage of the significant increase in this credit. If you increase your dependent care expenses in 2021, remember you won’t be able to include the same amount of expenses when calculating your credit in 2022, as this tax credit increase is currently for 2021 only.
- Conduct a tax forecast. With the dramatic increase in these credits, you may want to estimate next year's tax bill. It may make sense to adjust your withholdings to account for a lower tax obligation.
- Be conservative when forecasting your earned income tax credit. It is uncertain how the expanded earned income tax credit will impact those over 65 when you have no children. For example, are Social Security benefits considered earned income when calculating the earned income tax credit? Does the larger standard deduction for those over 65 affect the earned income tax credit calculation? Until clarification is issued by the IRS, you may wish to be conservative about the credit amount you'll receive.
The Gift of Grace
After living under the weight of the pandemic for more than a year and listening every day to the bad news around us, why not look for ways to change the conversation by doing something nice and unexpected for someone else.
Here are some creative ideas:
- Pay it forward. The next time you are in a drive-through line to pick up food, pay the bill for the car behind you. This unexpected act of kindness is sure to bring a smile.
- Become a tutor. Many students find virtual classrooms to be challenging and could use some extra help. And you don't need to be an expert! Even with students re-entering the classroom, your local school may be in need of assistance.
- Look to your neighborhood. Every neighborhood has someone who could use help. From single parents to seniors, simple everyday chores could be a real chore for them. It might mean mowing the grass or offering to go shopping to pick up items for them while you are out. And if you're up for it, consider offering free babysitting services for an hour or two so parents can take a well-deserved break.
- Make an elderly friend. Call a local nursing home or assisted care facility and ask if they have a friendship program that connects you with a resident that could use a pen pal. Get your kids to create a card with a picture to go with a short letter they write themselves. When it's appropriate after the pandemic, consider regular, in-person visits to say hi to your new pen pals.
- Do a good deed daily. This is a great way to create the habit of undertaking daily, random acts of kindness. By doing a good deed every day, your vision will change and you'll see more opportunities to help. Opening a door, picking up trash or helping a single parent who is juggling different tasks are all great examples of this.
- Bring back forgiveness. When someone makes a mistake, provide an environment to accept an apology and leave room to genuinely forgive. Continue to be a role model in displaying the act of forgiveness.
Giving the gift of grace is not only rewarding for you, but is also contagious to everyone around you.
Businesses Get More Time to Apply For PPP Loans
Legislation provides other business relief provisions
Here's what you need to know about the Paycheck Protection Program (PPP) loans and other business relief provisions of the recently-passed American Rescue Plan Act.
PPP loan application deadline extended. The deadline to apply for PPP loans is now May 31, 2021.
Sick leave extended. If your business provides sick leave for COVID-related reasons, you might get reimbursed for the sick pay through a tax credit.
- Businesses which voluntarily provide sick leave through September 30, 2021 qualify for the credit. There are limits for each employee. However, for employees who took 10 days of sick leave in 2020 using this same provision, they can take another 10 days beginning April 1, 2021.
- Refundable tax credits are available through September 30, 2021.
- Covered reasons to get the tax credit now include sick leave taken to get COVID testing and vaccination, and to recover from the vaccination.
- These benefits are also extended to self-employed workers.
Family Medical Leave Act Provisions extended.
- Additional coverage is now available through September 30, 2021.
- Qualified wages for this provision move to $12,000 (up from $10,000) however the credit was not increased.
- The Family Medical Leave Act also applies to the self-employed.
Big increase in Employee Retention Credit.
- Businesses can get up to a $28,000 tax credit per employee in 2021, up from a $5,000 maximum credit in 2020. This credit can be claimed through Dec. 31, 2021.
There are many more provisions in the close to $2 trillion dollar spending package, including money given to states. As everyone digests this new 500-plus page piece of legislation, more clarifications will be forthcoming from the IRS and other sources.
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