The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act provides critically needed stimulus and relief to businesses and individuals in the wake of the COVID-19 outbreak.
The following is a summary of CARES Act provisions applicable to individuals.
Tax Credit Rebates
Individuals are entitled to a tax credit against income in 2020. The credit will be provided in the form of a rebate issued in advance in order to provide taxpayers immediate or short-term relief. An individual filer will receive a $1,200 credit rebate. Joint filers will receive a $2,400 credit rebate. An additional credit rebate amount of $500 will be provided to a taxpayer for each qualifying dependent child. The credit rebate is reduced by $5 for every $100 of a taxpayer’s adjusted gross income over $75,000 ($150,000 for joint filers) and completely phased out for a single filer having no children and adjusted gross income of $99,000 ($198,000 for joint filers). The IRS will use a taxpayer’s 2019 income tax return (or 2018 return for taxpayers yet to file 2019 returns) as a starting point to calculate the credit rebate. The IRS will issue the credit rebate on the basis that a taxpayer will have a similar level of income in 2020. The credit rebate will be reconciled against a taxpayer’s 2020 income tax return once filed.
- a single filer with no children making $75,000 or less in 2019 will receive a full credit rebate of $1,200. No repayment will be required even if the taxpayer’s 2020 income tax return reflects more than $75,000 of income in 2020.
- a single filer with no children making $85,000 in 2019 will receive a reduced credit rebate in the amount of $700. If the taxpayer made less than $75,000 in 2020, the remainder of the $1,200 credit can be claimed on the taxpayer’s 2020 return.
Individuals can receive a credit rebate based on social security or tax-exempt income reporting in 2019. No action should be required of a taxpayer to receive the credit rebate. The IRS will issue credit rebates by electronic deposit or mail and will provide written notice of the rebate, within 15 days of issuing the rebate, by mail using the taxpayer’s last known address.
Waiver of Early Distribution Penalty in 2020
A ‘‘coronavirus-related distribution’’ from an eligible retirement plan not exceeding $100,000 shall not be subject to the 10% early distribution penalty. The early distribution penalty is normally applied to retirement plan distributions taken by a taxpayer before age 59 ½. An eligible retirement plan is a 401(k) plan, IRA, 403(b) plan or 457 plan. A ‘‘coronavirus-related distribution’’ is a distribution made in 2020 to an individual diagnosed with COVID-19, who has a spouse diagnosed with COVID-19 or who suffers financially as a result of quarantine, furlough, reduction in hours, business closure, or being unable to work due to a lack of child care caused by the virus.
A coronavirus-related distribution may be repaid within a three-year period beginning on the day after the date of the coronavirus-related distribution. In this case, the repayment will be treated as qualified rollover and will not be taxed. If a taxpayer does not elect rollover treatment, regular income taxes payable as a result of the coronavirus-related distribution will be payable over a three-year period starting with the year of the coronavirus-related distribution.
Retirement Plan Required Minimum Distribution Holiday
Similar to the relief granted in 2009 in response to the 2008 credit crisis, the CARES Act waives qualified plan required minimum distributions for tax year 2020. The provision applies to required minimum distributions from 401(k) plans, IRAs, 403 plans and 457 plans for taxpayers otherwise being required to take RMDs. This includes taxpayer’s that turned 70 ½ in 2019 and have to take their first RMD by April 1, 2020 (the SECURE Act’s new age 72 rule does not apply to those turning 70 ½ in 2019).
Retirement Plan Loan Rules Relaxed
Plan loan limits have been increased for 2020. A qualified individual can take a loan equal to the lesser of the participant’s accrued benefit or $100,000 (formerly one-half the accrued benefit and $50,000). Payment due in 2020 on a pre-existing plan loan can be delayed for one year and the payment schedule and accrued interest adjusted accordingly. The five-year required repayment period applicable to plan loans is now determined without regard to any period in 2020. A plan loan must qualify as a ‘‘coronavirus-related distribution’’ (see Waiver of Early Distribution Penalty in 2020, above).
Above the Line Charitable Deduction
For 2020 and thereafter, the CARES Act provides an “above the line” (gross income) deduction of up to $300 for charitable contributions made by individuals that do not itemize deductions. The contribution must be made in cash to a qualified charity. The deduction is not available for contributions to private foundations or donor advised funds.
Suspension of Charitable Deduction Limit for 2020
For individuals that itemize deductions, the CARES Act suspends the 60% of adjusted gross income limit for 2020, allowing unlimited charitable deductions in 2020. Similar to the above the line deduction for non-itemizers, the contribution must be made in cash to qualified charities that are not private foundations or donor advised funds.
Student Loan Repayments
For tax year 2020, the CARES Act adds student loan principal and interest as an expense that can be paid by an employer and excluded from income by an employee. If such expense is paid by an employer, any student loan interest deduction otherwise available to the employee is disallowed to avoid a double tax benefit to the employee.
For more support and information relating to COVID-19, please visit the Kerr Russell COVID-19 Resource Center. If you have questions relating to this article or other tax matters, please contact a Kerr Russell attorney.
John D. Gatti is a Certified Public Accountant as well as an attorney. He concentrates his practice in the areas of taxation, mergers and acquisitions, business law, real estate law, and estate planning. John also serves as the firm’s administrative partner and chairs the firm’s Taxation Practice Group. He has considerable experience representing professional services firms. These include accounting, engineering, and architectural firms, as well as insurance agencies, in purchase and sale transactions.
Liam K. Healy has a broad range of experience in business law and business tax matters. His practice in this area includes plan design strategies to achieve the maximum allowable contributions for the business owner clients. He also prepares determination letter applications and represents clients in IRS and Department of Labor audits. Liam also practices in the areas of employee benefits and ERISA. He regularly writes and speaks on the practice of tax and employee benefits law.
Cody Attisha focuses on taxation law, corporate law, mergers and acquisitions, finance, and estate and trust planning. He also helps clients with entity formation, including evaluating, choosing, and implementing the right partnership, corporate, or non-profit structure.
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