The CARES Act, which stands for Coronavirus Aid, Relief, and Economic Stability Act, was signed into law on Friday, March 27, 2020. Among other things, the law includes funding for public health, small business loans, and relief for certain large businesses in struggling industries. Some of these provisions have already been covered in a recent update. This article will focus on the types of relief that are available for individuals.
Recovery Rebates for Individuals
Eligible individuals and joint filers will receive a payment of $1,200 or $2,400, respectively, plus $500 for each qualifying child. Eligible individuals do not include dependents, nonresident aliens, estates and trusts, or anyone who does not have a Social Security number. A qualifying child means a child of the taxpayer who has not reached age 17. In addition, the payment is reduced by 5 percent of the amount by which the taxpayer’s adjusted gross income exceeds (i) $150,000 in the case of a joint return, (ii) $112,500 in the case of a taxpayer whose filing status is head-of-household, and (iii) $75,000 in the case of a single taxpayer or a taxpayer whose filing status is married-filing-separately.
For example, a married couple with a combined income of $170,000 and two children, ages 15 and 17, would be entitled to a rebate payment of $1,900 (calculated as follows: $2,400 + $500 = $2,900, reduced by $1,000 (i.e., $170,000 – $150,000 = $20,000 x 5%). Alternatively, if the couple’s combined income were $150,000, there would be no phase-out and the couple would receive the full $2,900 rebate. But consider if the couple’s combined income were only $26,200, which is the poverty limit for a household of four. In this case, the rebate payment would still only be $2,900. For comparison sake, the IRS’s national monthly standard for housing, food, clothing, and miscellaneous living expenses for this same Lancaster household is $3,871.
To function consistently with the Internal Revenue Code, the rebate payment is structured as an advance refundable tax credit against income earned in 2020. Rebates will be issued based on 2019 income tax returns, or 2018 returns for individuals who haven’t yet filed their tax return for 2019. A taxpayer who is ineligible to receive a rebate payment because his or her income as reported on the 2018 or 2019 tax return exceeds the threshold may nevertheless be entitled to a tax credit when the 2020 tax return is filed if the taxpayer’s income has declined during 2020 as a result of the pandemic. Notably, some low-income taxpayers who do not typically have a tax return filing requirement may have to file a “simple” return in order to receive a rebate payment. Guidance from the IRS in this regard is pending.
The rebate payments may be direct-deposited to any account authorized by the taxpayer to receive a federal tax refund or other federal payment (including Social Security). This authorization must have been made on or after January 1, 2018. Rebate payments that cannot be made electronically will be mailed to the taxpayer’s last address of record. Rebate payments will not be offset to satisfy other state or federal liabilities, with the exception of state child support.
Special Rules for Retirement Funds
Using Retirement Funds Without Penalty
The CARES Act waives the 10 percent early withdrawal penalty for “coronavirus-related distributions” from retirement plans. The penalty waiver applies to the first $100,000 of aggregated coronavirus-related distributions. A “coronavirus-related distribution” is any distribution from an eligible retirement plan made (i) on or after January 1, 2020, and by December 31, 2020, (ii) to an individual (a) who has tested positive for COVID-19 (or the virus SARS-CoV-2), (b) whose spouse or dependent has tested positive, or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to the COVID-19 pandemic; as a result of being unable to work due to lack of child care due to the pandemic; or as a result of reduced business hours or closure of a business owned or operated by the individual due to the pandemic. Other factors may also be considered as determined by the Secretary of the Treasury.
Taxation of Coronavirus Distributions
Although the 10 percent penalty may not apply to early distributions, a coronavirus-related distribution is still taxable income. However, the CARES Act provides that, unless the taxpayer elects otherwise, the amount of the coronavirus-related distribution will be included in gross income ratably over the three-year period beginning in 2020, when the distribution was received. In other words, taxpayers will be able to spread the tax on the distribution over three tax years.
An individual who receives a coronavirus-related distribution may recontribute these funds to an eligible retirement plan. The contribution will be treated as a 60-day rollover, so long as it occurs prior to the expiration of the three-year period beginning on the date the distribution was received. For instance, if a taxpayer who is experiencing financial difficulties needs to take an early distribution from an IRA, not only will the 10 percent penalty be waived, but the taxpayer will have the opportunity to reinvest the funds in a tax-favored retirement plan, notwithstanding the normal limits on contributions, in order to avoid paying income tax on the distribution.
Increased Loan Limits From Qualified Employer Plans
Under the CARES Act, the maximum loan amount that may be taken from a qualified employer plan has doubled to $100,000. In addition, if a loan taken previously would normally be required to be repaid between March 27, 2020, and no later than December 31, 2020, the due date for the repayment is delayed by one year.
Required Minimum Distribution Rules Waived for 2020
The CARES Act waives the required minimum distribution rules for 2020 for defined contribution plans, including an eligible deferred compensation plan, as well as for individual retirement plans. This waiver also applies to an individual who turned 70-½ in 2019 and whose required beginning date was April 1, 2020.
Eligible individuals, regardless of whether they itemize deductions, can take a deduction of up to $300 for qualified charitable contributions made during 2020. A taxpayer who itemizes deductions is not considered an “eligible individual” for this purpose since the charitable contribution could be claimed as an itemized deduction. A “qualified charitable contribution” must be made in cash to a public charity. Contributions to donor-advised funds and supporting organizations do not qualify.
Normally, the amount of charitable contributions that an individual is permitted to deduct is limited to a percentage of adjusted gross income. Under the CARES Act, that limitation is suspended for qualified contributions made in 2020. In other words, 100 percent of a qualified contribution may be deducted, without regard to adjusted gross income. As with above-the-line deductions, a qualified contribution must be made in cash to a public charity, and contributions to donor-advised funds and supporting organizations do not qualify. In addition, the 15 percent net income limitation that usually applies to contributions of food inventory has been raised to 25 percent. This means that a greater percentage of a contribution of food inventory may be deducted.
Student Loan Repayments
Finally, the CARES Act also excludes from income certain student loan debt repaid by an individual’s employer. This exclusion applies to payments made to the employee or directly to the lender between March 27, 2020, and December 31, 2020.
This update was prepared by attorney Doug Smith, who practices in the areas of estate planning, estate administration, tax law, and business and nonprofit planning. It does not constitute legal advice and has been prepared for informational purposes only. Please contact Doug directly with questions about how these provisions affect you.