On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act, H.R. 748, passed through Congress and received President Donald Trump’s signature. While the biggest headline surrounding the bill has been the $2 trillion aid package designed to help the economy as it suffers from the effects of the coronavirus pandemic (see more HERE), the bill also contains a host of tax measures.
As part of our coverage on the CARES Act, we analyze the effects of the bill on Individual Taxation.
How does the CARES Act affect individual taxation?
1. “Recovery Rebates”
One of the most talked about components of the CARES Act is the “Recovery Rebates.” They are payments to taxpayers being treated as advance refunds of a 2020 tax credit. All U.S. resident individuals, who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for a $1,200 rebate ($2,400 married filing jointly) and an additional $500 per child. A phase-out process based on an adjusted gross income (AGI) is as follows:
- Single Taxpayer: $75,000 (completely phased out at $99,000)
- Head of Household Filer: $112,500 (completely phased out at $146,500 with one child)
- Married Couples Filing Jointly: $150,000 (completely phased out at $198,000)
The Internal Revenue Service (IRS) will base these amounts on the taxpayer’s 2019 tax return. However, if 2019 returns have not yet been filed, they will utilize 2018 tax returns. If a taxpayer has not filed a 2019 or 2018 tax return, the IRS may use information provided on Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement, for the 2019 calendar year.
The credit is not available to nonresidents, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
The provision does not have an effective date. Per the bill, the IRS should issue the refund or credit any overpayment attributable to this provision as rapidly as possible. However, no refund or credit shall be made or allowed under this provision after December 31, 2020.
2. Eased Retirement Restrictions
Waiver of early withdrawal penalty
The CARES Act loosens restrictions on withdrawals from qualified retirement plans. Specifically, the bill waives the 10% penalty for early withdrawal from a qualified retirement account and allows taxpayers to either (a) pay taxes on distributions ratably over three years, or (b) elect to defer the tax entirely for up to three years. These provisions apply to a maximum of $100,000 “coronavirus-related distribution,” per taxpayer.
Coronavirus-related distribution means any distribution from an eligible retirement plan made between January 1, 2020 through December 31, 2020 to an individual who:
- Receives a positive diagnosis of the virus SARS-CoV-2 or COVID-19 by a CDC-approved test,
- Has a spouse or dependent diagnosed with COVID-19, or
- Experiences adverse financial consequences as a result of:
- Quarantine, furlough, lay offs, or reduced work hours due to such virus or disease,
- Being unable to work due to lack of childcare due to COVID-19,
- Closure or reduced hours of a business owned or operated by the individual due to COVID-19, or
- Other factors determined by the Secretary of the Treasury.
The plan administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions above.
Expanded Participant Loans
The Act provides further flexibility by increasing the dollar amount of loans that a taxpayer can take from certain retirement plans for coronavirus-related relief. More specifically, the bill increases the limit to the lower of $100,000 or 100% of the account balance. The loan limit is effective for a 180-day period starting on the date of the bill’s enactment.
The CARES Act also extends the repayment due date of certain outstanding loans from qualified employer plans by delaying repayment for one year if the repayment date falls before January 1, 2021. For this purpose, taxpayers affected by COVID-19 include those diagnosed with the virus or whose spouse or dependent has been diagnosed, and taxpayers who have experienced adverse financial consequences as a result of to the virus. These consequences are listed above.
Temporary Waiver of Required Minimum Distributions
The bill also temporarily waives the required minimum distribution rules for certain defined contribution plans and IRAs for the 2020 calendar year. Typically, individuals must take mandatory distributions starting at age 72, but such distributions are not required during 2020. This provision is effective for calendar years beginning after December 31, 2019.
3. Charitable Contributions
Taxpayers taking the standard deduction on their personal returns are now eligible to deduct up to $300 in charitable contributions for cash payments made in 2020 to authorized, publicly supported charitable organizations. This “above-the-line” deduction is available only to taxpayers who do not itemize their deductions.
Taxpayers cannot use the deduction to make contributions to a non-operating private foundation or a donor advised fund.
Modification of limitations on cash contributions
For taxpayers who do itemize their deductions, the CARES Act temporarily suspends the AGI limitation for qualifying cash contributions. As such the bill permits individual taxpayers to take a charitable deduction of up to 100% of their AGI for qualifying cash contributions made in 2020. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.
As with the aforementioned above-the-line deduction, the contribution must be made in cash to a public charity or foundation described in Section 170(b)(1)(A). Contributions to non-operating private foundations or donor advised funds are not eligible.
How can Squar Milner help?
In uncertain times, it is important to have the most up-to-date and accurate information. Our Squar Milner tax team is here to walk you through all tax-related components of the CARES Act.
We are here to answer any questions you may have regarding the new legislation or other coronavirus-related tax and financial measures. But more than that, we can help you come up with a plan.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.