As Congress negotiates what will become of the next stimulus package, there are still important benefits from the first package you might have missed.
In March, we saw Congress pass the Cares Act and most of the attention went towards the $1,200 stimulus check and the federal unemployment benefits. With the checks mostly disbursed and the federal unemployment benefits expired, you might not be thinking too much about that bill.
But there are several Cares Act benefits you may have overlooked. You can use these incentives now to help alleviate some of your current financial stresses.
Relaxed 401(k) and IRA Withdrawal Rules
If you have retirement accounts, the Cares Act made it easier for you to access them. You’re less likely to pay penalties if you must tap your 401(k) or IRA retirement accounts for coronavirus-related expenses.
No 10% Early Distribution Penalty
The Cares Act waives the 10% early distribution penalty for the first $100,000 in coronavirus expenses. You can make distributions from traditional or Roth 401(k) and IRA retirement plans.
This penalty waiver applies to qualified withdrawals you make between January 1, 2020 and December 31, 2020.
While you can avoid the 10% early distribution penalty, you are still responsible for paying federal income taxes on tax-deferred contributions. You have up to three years to pay the income taxes on the distributions from your traditional retirement accounts.
The default payment schedule is to pay one-third of the taxes on your 2020, 2021, and 2022 tax returns. You can also make one lump-sum payment on your 2020 taxes.
The IRS “forgives” any income tax you owe on a distribution if you repay it within five years. If you are able to, paying back what you took out will mean you don’t have to pay the tax plus your money is again back in a tax-advantaged account.
You may need to file an amended federal tax return to calculate the tax you own on coronavirus-related distributions accurately.
401(k) Loans of up to $100,000
Employers can also allow coronavirus-related 401(k) loans up to $100,000 instead of the standard $50,000 limit. Employees can only borrow up to their current 401(k) account balance if it’s less than the $100,000 borrowing limit.
This temporary loan ceiling increase is from March 27, 2020 and September 22, 2020 from qualifying plans.
Also, repayments for pre-existing 401(k) loans may temporarily extend your loan due date. Loans due between March 27th and December 31st of this year may push the due date up to one year. Interest on the remaining loan balance continues to accrue during the delay period.
Temporary Waiver for Required Minimum Distributions
Retirees with a traditional 401(k) or IRA can defer required minimum distributions (RMDs) for the calendar year 2020. Skipping RMDs minimizes your tax bill if you don’t need the cash.
Roth IRAs and 401(k) plans do not have RMDs. If you have traditional and Roth accounts to pull from, you may choose the Roth distributions first as they are naturally tax-free.
Federal Student Loan Payment Moratorium
You can enjoy a payment reprieve on qualifying federal student loans through September 30th.
Interest-Free Monthly Payment Suspension
Most federal student loans are in administrative forbearance from March 13th through September 30th. Payments will restart in October unless lawmakers extend this moratorium.
The US Department of Education is temporarily reducing the interest rate to 0% APR for all qualifying loans. Usually, loans continue to accrue interest during a personal forbearance period.
You can, if you choose, make voluntary payments during this time. The entire payment amount applies to the loan principal if your interest is current.
Each suspended payment also counts toward the 120-month threshold for the Public Service Loan Forgiveness (PSLF)—that’s seven months of credit even though you don’t submit payment.
No Garnishments for Defaulted Loans
The Department of Education is not garnishing wages or withholding federal tax refunds, disability, or Social Security benefits as payment for defaulted federal student loans.
This withholding moratorium lasts until September 30th when the administrative forbearance period currently ends.
Income-Driven Repayment Recertification Date Extension
You have an automatic six-month extension to recertify your income for income-driven repayment plans. The Education Department will start recertifications on October 1. You should receive a notice of your updated income recertification due date.
Tax-Free Employer Student Loan Payments
Employers are slashing employee benefits like matching 401(k) contributions during this time. However, your employer can make tax-free federal student loan payments of up to $5,250. Educational assistance for expenses including tuition, fees, and books can be tax-free too.
The tax-free payments must occur between the Cares Act enactment date of March 27, 2020 through December 31, 2020.
Employer-paid benefits made outside of this period are taxable on the employee’s federal tax return.
Federal Unemployment Benefits
The enhanced $600 weekly federal unemployment benefit expiring on July 31st is receiving plenty of media coverage. State unemployment beneficiaries automatically received this weekly benefit during the spring and early summer months.
However, this $600 weekly benefit—formally known as Pandemic Unemployment Compensation (PUC)— is only one part of the Cares Act unemployment package.
There are two other federal unemployment provisions you may qualify for. Also, the Cares Act waives the standard one week waiting period before you can file for unemployment.
As a friendly reminder, all unemployment benefits are taxable.
State Unemployment Insurance Benefit Extension
The Pandemic Emergency Unemployment Compensation (PEUC) extends state unemployment insurance benefits by 13 weeks—up to 39 weeks of total benefits.
State unemployment benefits generally end after 26 weeks in most states. Federal money pays your state unemployment benefit for another 13 weeks. While you’re no longer getting the weekly $600 federal aid, some relief can be better than nothing at all.
This benefit extension currently ends on December 31st and can help if you lose your job in the second half of 2020.
$600 Weekly Benefit for Non-Traditional Workers
The Pandemic Unemployment Assistance (PUA) provision provides a weekly $600 benefit for up to 39 weeks. This benefit is for those who don’t qualify for state unemployment insurance.
Gig workers, part-time employees, and the self-employed can qualify for PUA benefits. Also, you may receive this payment through December 31, 2020.
Generous Charitable Contribution Tax Deductions
You can deduct more of your charity donations on your 2020 federal tax return.
$300 Tax Deduction for Non-Itemizers
Typically, you must file an itemized tax return to deduct your charitable donations. The Cares Act lets taxpayers deduct their first $300 ($600 for joint filers) in tax-deductible charitable contributions in 2020.
This deduction reduces your taxable income when you file in 2021. Make sure you have proof of making a qualifying contribution, just in case.
Full Deduction for Itemized Tax Returns
If you can itemize this year, the IRS is letting you deduct up to 100% of your adjusted gross income (AGI) for cash contributions. The standard cap is 60% of your AGI.
Tax-Free Health Savings Accounts Withdrawals
Health savings accounts (HSA) are an overlooked yet easy way to save for future medical costs.
There are now more ways you can make tax-free HSA withdrawals:
- Telehealth visits before reaching your annual cost-sharing limit
- Over-the-counter medication without a prescription
- Covid-19 testing and treatment
- Health insurance premiums—if unemployed
IRS Notice 2020-15 covers more of the qualifying expenses you can use HSA funds for.
Free Weekly Credit Reports
You can access your free credit reports each week from the Equifax, Experian, and TransUnion credit bureaus. The quickest way to view your reports is at AnnualCreditReport.com that the federal government powers.
While you won’t see your credit score, checking your report each week lets you spot potential fraud and reporting errors quickly. Usually, federal law only requires the bureaus to provide you with a free credit report once per year.
Federal Eviction Moratorium
The Cares Act 120-day eviction moratorium for federally-backed rental properties and home mortgages ended on July 25th. There is currently a 30-day waiting period before landlords and banks can start the eviction process.
Federal lawmakers may extend the eviction moratorium but it wasn’t included in the HEALS Act. You have until August 24th to renegotiate your payment schedule or catch up on your payments.
While we don’t know when the next stimulus package will pass and what provisions it will contain, these Cares Act benefits are already here—and legit. While Capitol Hill and the White House deliberate over how to provide the next round of help, you can start taking action today to help your family.