The CARES Act 101: Planning Opportunities




Written by Jared Machen, CFP®, Paraplanner, and Richard Krohley, Paraplanner


The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and was signed into law by President Trump on March 27th, 2020.  Ever since the CARES Act was signed, advisors and end-clients have been decoding this new law and how the CARES Act might affect them and their personal finances.


Due to high demand, the Nifty Paraplanning team shares their own financial planning strategies that have arisen due to the CARES Act and the current uneasy economic environment.



THE CARES ACT & YOUR CLIENTS

Debt, Retirement, Tax Minimization, Small Businesses


Debt Reduction Strategies:

  • Put an extra dent in your debt because federal loans have been deferred. Consider allocating that same amount you'd usually pay for federal student loans to higher-interest loans.

Retirement Planning Strategies:

  • Delay taking required minimum distributions (RMD) since RMD requirements for 2020 has been waived. If you have the financial flexibility to live off other assets, reducing your RMD should lower taxable income this year. 

  • Consider a Roth conversion if your income is lower this year or if you have a lower tax bracket than normal by not taking your RMD.

Tax Minimization Strategies:

  • Get a tax break for charitable contributions without itemizing. Historically, you could only deduct charitable contributions if you selected the itemized deduction. Now you can take an above the line deduction of $300 for contributions made to qualifying charities regardless of whether or not you itemize deductions.

  • Suspension of the 60% adjusted gross income limitation for charitable contributions: Individuals could receive a charitable contribution deduction for up to 100% of their 2020 adjusted gross income.

  • Harvest investment losses. Realizing capital losses in your portfolio and rebuying comparable securities is an opportunity to create taxable losses in your portfolio while maintaining similar market exposure.

  1. Keep in mind, tax loss harvesting is only useful for people who have a taxable brokerage account. If your investment portfolio is solely in tax-advantaged retirement accounts, such as 401(k)s and IRAs, tax-loss harvesting isn’t for you.

  2. There are several scenarios where tax-loss harvesting may be useful. If you’ve seen capital gains in your portfolio, you can use investment losses to offset those gains. If you have more losses than capital gains, you can carry forward excess losses to future tax years.

  3. Even if your portfolio hasn’t seen any capital gains, you can claim up to $3,000 in investment losses against your ordinary income (such as your salary or withdrawals from a pre-tax retirement account) on your federal taxes. If you have more than $3,000 in losses, you can carry the balance forward and take $3,000 each year against ordinary income until you’ve exhausted the full amount of losses.

  4. If someone takes a long-term loss of $10,000 and they don’t have any gains that they’ve realized in my portfolio this year, they can use $3,000 of that $10,000 against ordinary income this year. The remaining $7,000 can be carried forward into the next year and the year after. Those losses don’t have to be used in the year they’re taken.

  5. When it comes to capital gains, it’s worth noting that tax law qualifies gains and losses as short-term and long-term. Gains and losses realized on investments you’ve held for less than one year are short-term, and those realized on investments you’ve held for more than one year are long-term.

  6. Tax law requires that you must first offset short-term losses against short-term gains and long-term losses against long-term gains. That said, once losses of one type exceed the gains of that type, you can apply them to the other gains you have in your portfolio.


For Small Business (up to 500 employees):

  • Relief for existing loans: Support to cover six months of payments for small businesses already using SBA loans.

  • Tax credit: A refundable payroll tax credit of 50% of employee wages (up to $10,000) per employee for businesses forced to fully or partially suspend operations or that experience a year-over-year decline in gross receipts of 50% or more.

  • Emergency grants: For grants up to $10,000 to provide emergency funds to cover immediate operating costs.

  • Expanded flexibility for use of Net Operating Losses (NOLs). The CARES Act reintroduces another significant tax provision affecting small businesses – the carry forward/back of net operating losses (NOLs). Prior to the Tax Cut and Jobs Act of 2017, businesses were able to carry back NOLs two years and carry forward up to 20 years. The CARES Act is far more generous and may enable companies to amend returns as far back as 2016. This provision will create significant cash relief for businesses.

  • Forgivable loans: Loans up to $10 million per business. Portions of the loan can be forgiven provided workers stay employed through the end of June.

  • Employers can pay up to $5,250 toward employee’s student loans without the employee incurring taxes.

  • The business interest expense deduction limit has been increased from 30% to 50% for 2019 and 2020. The Act provides a refundable payroll tax credit of 50% of wages up to $10,000 per employee to help businesses keep people employed.

  • 2020 employer payroll tax payments can be deferred – half due in each 2021 and 2022.


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