On March 27th, the government passed the largest economic stimulus package ever signed into law; Coronavirus Aid, Relief and Economic Security Act of 2020, otherwise known as the CARES Act. Like most government documents, it’s long, at over 800 pages. I am sure that even if you googled ways to beat the boredom during the stay-at-home order, no one would suggest reading the CARES Act in its entirety.
With anything, the underlying question is, how does this impact me? The potential benefits of the CARES Act go much further than the most widely known benefit of the stimulus money being deposited into your account. The CARES Act includes financial planning changes that can help you. Knowing about your options and the potential benefits can lead to better financial decisions and even add money to your pocket!
Here are two of the changes that I believe have the largest impact for clients that I work with.
RMD RULES TAKE A HIATUS FOR 2020
Required Minimum Distribution (RMDs) refers to the minimum amount of money required to be taken annually from a retirement account either once an owner reaches a certain age or when someone has inherited an IRA from a non-spouse. They are those pesky distributions the government makes you take each year so the IRS can tax you. When the SECURE Act passed in December 2019, the RMD age was raised to 72. To make things a bit more confusing, those new requirements are temporarily adjusted.
Under the CARES act, all RMDs requirements have been suspended for 2020, including RMDs that are normally required for inherited IRAs. The suspension is at your discretion. If you do not need the distribution or are in a position to reduce the amount of your distribution, you should consider the potential benefits of suspending or reducing your RMD.
Recent market volatility has created losses even in the most diversified portfolios. Selling assets to create a distribution would lock in recent losses; suspending the RMD could allow funds to stay invested and participate in any potential gains that we may experience during the remainder of the year. Even if your funds were already in cash or a money market position in preparation for your annual distribution, and you have a plan in place to cover your future distributions, you could consider using the extra cash to rebalance your account to your original target allocations.
Suspending your RMD create potential market opportunity it will also help you avoid current taxation. Normally your required minimum distributions are added to your taxable income in the year you receive the distribution, and it is taxed at your ordinary-income rates. By not taking the RMD, you reduce the amount of money you need to send to your least favorite family member, Uncle Sam. It is also possible that suspending your RMD reduces your marginal tax bracket.
If you processed your RMD before the CARES Act, you may still be able to participate in the suspension. People who have taken their distribution within the last 60 days can write a check or deposit the funds back into the IRA. As long as the funds are returned within the 60-day window, the contribution will be allowed and coded as a rollover. Please note the rollover option is not available on inherited IRAs. The IRS has also indicated people who have been ‘impacted’ by COVID-19 will be able to return the required minimum distribution beyond the 60-day window. Still, as of this writing, they have not issued guidance on their definition of ‘impacted.’
CHARITABLE GIVING JUST BECAME SWEETER
Charitable contributions are extremely valuable, especially during times like these, when many people are struggling and do need help. The government just made giving to charitable organizations even better for you by giving you a tax benefit. It’s nice to have a win, win, win situation. You are helping others, others are getting much-needed assistance, and you can get additional tax benefits for doing a good deed.
Typically deductible charitable contributions are limited to 60% of your adjusted gross income (AGI). The CARES Act increased the annual deductible limits to qualified charities to 100% of your AGI to be taken as a charitable deduction which means you could bring your income tax liability down to 0. If you donate more than your AGI for 2020, you can carry forward the excess five years. Of course, most of us are not in the position to donate that generously, and under the current standard deductions, most of us do not even have enough write off’s, including charitable donations, to itemize.
If you cannot itemize, The CARES Act also added what is called an above-the-line deduction for charitable contributions. For 2020, you can give up to $300 to a qualified charity and take a tax deduction, regardless if you itemize or not. It is important to know that the $300 must be contributed as cash. While the actual tax benefit to this is small, when it comes to the IRS, every bit helps.
Everyone from all walks of life are experiencing challenges with the current pandemic. While we may experience similarities and have similar financial choices, every individual is different. Knowing your situation and the available options is important in making decisions. If you are uncertain about the financial options you have to consider and would like an opinion on your financial situation; please reach out to me at email@example.com. Stay safe, stay healthy and follow River City Wealth Management here on Facebook to get timely insights on the markets and financial planning topics.
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