In an Act so extensive, how can a financial professional help clients navigate a path? As a start, the four questions below may help individuals, families, and clients determine where there may be benefits as a result of the Act.
1. Will your client receive a Recovery Rebate?
The Recovery Rebate is an immediate, nontaxable cash payment of $1,200 for an individual or $2,400 for a married couple filing jointly. Parents also are eligible for a payment of $500 for each child under the age of 17 at the end of 2020. There are income limits, so those making more than $75,000 for an individual filer or $150,000 for a married couple filing jointly will receive a reduced payment or no payment at all.
Checking with clients on the Recovery Rebate is an opportunity to assess how the client is feeling about their finances.
2. Is your client taking, or close to taking, required minimum distributions (RMDs)?
The Act offers RMD relief. Similar to the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), the CARES Act waives the RMD requirement for 2020. This includes individuals who chose to delay their first RMD for 2019 into 2020. The Act allows those with an RMD deadline of April 15, 2020, to push that date to April 15, 2021.
What if the client has already taken the RMD?
For RMDs taken between February 1, 2020 and May 15, 2020, the client can likely roll the payment back into an IRA. They might also choose to convert the distribution to a Roth IRA. But beware: Make sure the client has not done an indirect rollover in the last 365 days. Note that inherited IRAs are included in the waiver. For beneficiaries using the five-year or life expectancy payout for accounts inherited prior to 1/1/20, the RMD is waived in 2020. For beneficiaries who inherited after 12/31/19, the CARES Act does not mention the 10-year rule. This is likely because that rule applies to beneficiaries of an owner who dies in 2020 or later.
3. Is your client charitably inclined?
The CARES Act makes two charitable contribution changes.
There is a new deduction for charitable contributions. Any taxpayer now has an above-the-line deduction of up to $300 of cash contributions to public charities. That means a tax filer who uses the standard deduction can still deduct up to $300 in charitable contributions, even though they do not itemize.
For 2020, the income cap on deductions is removed for charitable contributions of CASH. Those itemizing their deductions can elect to deduct up to 100% of adjusted gross income (AGI). Contributions must be in CASH and to a public (for example, a 501(c)(3)) organization. The corporate contribution limit is increased from 10% to 25%.
The CARES Act changes charitable planning for 2020. First, older clients should determine whether using a qualified charitable distribution (QCD) is a better strategy than making a deductible contribution. Clients using the standard deduction should remember that $300 of their cash contributions is still deductible. And some clients may use this as an opportunity to significantly lower their other ordinary income, and do a Roth conversion.
4. Does the client or family members have student loans?
The CARES Act gives immediate, albeit temporary, relief to those paying student loans. Student-loan payments can be deferred until September 30, 2020. No interest will accrue during that time. Most importantly, this period will continue to count toward any loanforgiveness programs.
An additional note: The CARES Act also allows employers to make a discretionary $5,250 nontaxable contribution to reduce an employee’s student loans. This employer contribution is elective, so employees should check with their human resources departments.
Financial professionals can reach out to clients to make sure they, or their children, take advantage of this interest-free suspension. This is a voluntary program, which means payments are not automatically stopped. Students who are paying automatically from a checking account will have to actively suspend their payments.
There is a lot for clients to consider. As opportunities develop, the Retirement Strategies Group will provide additional information and resources to support your efforts.
For additional information on the CARES Act, please contact the Retirement Strategies Group at (800) 722-2333, or email us at RSG@PacificLife.com.