KEY PROVISIONS OF THE CARES ACT AIMED AT INDIVIDUALS

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced a variety of assistance to businesses, industries and individuals. Perhaps the most talked about assistance was the establishment of the Paycheck Protection Program and the Payroll Protection Loans offered through that program.

Here we will focus on provisions of the CARES Act aimed at providing assistance to individuals.

Provisions Providing More Flexibility in the Use of Retirement Account Funds

The CARES Act expanded the ability to take in‐service distributions from employer retirement plans by allowing for up to $100,000 in distributions without being subject to the 10% premature distribution penalties for qualified individuals. Furthermore, participants may elect to have the distribution taxed over a 3 year period, if desired, and the distribution can be recontributed to another eligible retirement plan within 3 years as a rollover. Individuals must be able to provide that COVID‐19 affected them personally. The employer provided retirement plan must allow for in‐service distributions and must be amended to specifically allow for the CARES Act distribution.

The CARES Act also provides for qualified individuals to take up to a $100,000 loan from their employer provided retirement plan. Participants do not have to start paying the loan back until January 1, 2021. These loans must be taken between March 27, 2020 and September 23, 2020 and individuals must be able to prove that COVID‐19 effected them personally. The employer provided retirement plan must allow for participant loans and must be amended to specifically allow for the expanded loans.

Early distribution and loan provisions under the CARES Act is restricted to individuals with a COVID‐19 related reason for early access to the retirement funds. These include:

  • Being diagnosed with COVID‐19
  • Having a spouse or dependent diagnosed with COVID‐19
  • Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID‐19
  • Lack of childcare because of COVID‐19
  • Having a job offer rescinded or a job start date delayed due to COVID‐19
  • Experiencing adverse financial consequences due to an individual or the individual’s spouse’s finances being affected due to COVID‐19
  • Closing or reducing hours of a business owned or operated by an individual or their spouse due to COVID‐19

Additional considerations for taking an early distribution or loan:

  • COVID‐19 distributions do not require any federal taxes to be withheld but are subject to tax at an individual’s effective tax rate. Make sure, if you do not have any taxes withheld, to budget for tax owed when you file your form 1040.
  • If you decide to redeposit the distribution within 3 years to a retirement plan account, you will need to amend any prior year filings that you reported the distribution as taxable. If you tax the distribution over 3 years, it could mean amending 3 years of returns including federal and state returns.
  • If you have access to bank loans, it may be cheaper take a loan rather than tap your retirement plan account as you will miss out on stock market gains, especially if you experienced serious losses in the COVID‐19 crash. After the COVID‐19 crash, most indexes rebounded and gains have wiped out most of the losses.

The CARES Act also waived Required Minimum Distributions (RMD) for 2020. This impacts anyone born prior to July 1, 1949 and most non‐spousal heirs who inherited tax‐deferred accounts. If you already took an RMD for 2020, you have until August 31, 2020 to put the RMD funds back into your account.

Provisions Aimed at All Individuals

The CARES Act provides for an above the line deduction for cash contributions of up to $300 for individuals who do not itemize deductions, but rather take the standard deduction. It should be noted that there is no expiration date associated with this provision, which means it stands a good chance of being applicable for future years.

The CARES Act allows an employer to pay up to $5,250 annually towards an employee’s student loans with the payment being excluded from the employee’s income. The provision applies to any payments made on behalf of an employee after the date the CARE Act was enacted through December 31, 2020.

The CARES Act provides for payments of $1,200 to individuals with Adjusted Gross Income (AGI) up to $75,000 and joint filers up to $150,000 of AGI and who are not dependents of another taxpayer. Additionally, eligible individuals can receive $500 for each child that qualifies as a dependent. Individuals in higher tax brackets receive a reduced rebate that is phased out at AGI’s exceeding $99,000 for individuals, $146,000 for head of household filers and $198,000 for joint filers. These payments are not taxable to the taxpayer. If eligible to receive the payment and you do not receive it before yearend, you will receive it as a credit on your 2020 form 1040 filing.

Final Thoughts

As you can see, there are several provisions, which may be a help to individuals depending on their circumstances. Not sure where to turn? Whether you just have a question, need clarification or advice, or need your taxes prepared, feel free to drop me a line. I am available via email at Briand@hobe.com or via info@hobe.com. I am also available by phone at (216) 524‐8900 extension 230.

Estate Planning: Will, Trust, or Both?

by: Melissa Love, CPA

Most people dread even thinking about estate planning.  Although not the happiest of topics, taking the time to explore options and make the appropriate decisions now, can help give you peace of mind later – and could save you money.  A properly planned estate is less about death and more about having control of your assets.

Everyone’s estate plan should include a Last Will and Testament  

A will is a document that directs your wishes after death.  It can designate both financial requests, like how your assets will be distributed, as well as your non-financial wishes, such as funeral arrangements or who will be granted guardianship of your children.  Without a will, your assets will be distributed according to state law.  Wills are both easy and inexpensive to create and can be amended throughout your life as your situation changes.

Utilize a trust to achieve your estate planning goals

A common misconception is that only the rich need trusts.  Depending on an individual’s situation, a trust can benefit more than just wealthy individuals.  There are many types of trusts available to suit specific needs and can provide benefits such as avoiding estate tax, disability planning, flexibility to access assets prior to death, and income tax savings.

A primary reason people choose set up a trust is to avoid probate.  Probate is a process that occurs after death, when a state court oversees the administration of the will.  It ensures debts are paid and the individual’s assets are distributed according to the wishes of the deceased.  This process can be very lengthy – lasting months to even years to complete, during which time the assets are not accessible by the beneficiaries.

Another benefit of a trust is that it takes effect when it is formed – unlike a will, which isn’t enforceable until death.  This is especially important if an individual becomes physically or mentally incapacitated prior to death.  Without any other directions, the court can take control of your assets prior to death.  A trust can specify your directives in the event of disability.

Trusts allow an individual to give detail on the timing and terms of the distribution of their assets, which can be useful to avoid possible creditors or lawsuits of designated beneficiaries.  Trusts can also be helpful if you plan to direct your assets to provide ongoing care for a beneficiary, such as a child with special needs.

For higher net worth individuals, those who own a lot of real estate, those with assets in multiple states, or those who have specific instructions how and when assets are to pass to beneficiaries, can benefit from utilizing trusts.

A will may be enough

Although they can be very beneficial, a trust is not always needed.  Trusts can cost thousands of dollars to set up, with additional charges to maintain or amend the terms in subsequent years.  In many cases, having a properly established will may be sufficient to suit an individual’s needs.  It is important to keep the details of the will current, and make it as detailed as possible, so there is no confusion when distributing the assets.

Avoiding or limiting your assets from probate is possible, even without a trust.  Assets with properly designated beneficiaries, such as life insurance policies and retirement accounts, are excluded from the probate process.  It is recommended if you are not utilizing a trust, that you take care to designate beneficiaries on as many of your assets as you can.  Ohio permits an individual to title investment and bank accounts as “payable on death” which designates a beneficiary, thus avoiding probate.

Taking the time to designate beneficiaries on your assets, making your wishes clear and detailed in your Last Will and Testament, and making the proper arrangements for how your affairs will be handled, both at death and in the event of disability, could be ways to achieve your estate planning goals without the need for a trust.

Each individual’s situation is different.  In each instance, we recommend you consult with a knowledgeable estate attorney to discuss which options will be most advantageous in achieving your estate planning goals.  Contact us for guidance and recommendations of attorneys in your area.