The Coronavirus Aid, Relief and Economic Security Act (CARES Act), passed on March 27th, is designed to provide relief to individuals and business. This legislation addresses concerns ranging from small business interruption to individual, family, and business economic relief. This summary focuses on those provisions relevant to individuals.
Individuals, other than nonresident aliens and individuals who can be claimed as dependents (whether or not they were claimed as such) who have a Social Security number, are eligible for a one-time refundable federal income tax credit. The tax credit is:
- $1,200 ($2,400 for individuals filing jointly);
- plus $500 for each dependent (under age 17), which could be a child of the taxpayer or other qualifying relative.
The amount of this credit is reduced and phased out for taxpayers with more than a threshold adjusted gross income (AGI). The amount of the credit is reduced (but not below zero) by five percent of the taxpayer’s AGI in excess of:
- $150,000 for joint return filers
- $112,500 for head of household filers
- $75,000 for filers other than joint filers and head of household filers.
The credit is based on the individual’s 2019 tax information, but 2018 tax information will be used if the 2019 income tax return has not been filed. So, if a taxpayer would not qualify for the credit in 2018 but would in 2019 it is imperative to get the 2019 income tax return filed as soon as possible to avoid delay. Additionally, if the taxpayer is not required to file a tax return, the Service will look to the taxpayer’s Form SSA-1099, social security benefit statement or RRB-1099 Social Security Equivalent Benefit Statement – but you are better off filing a tax return.
The payments will be made between now and December 31, 2020. In many cases, it will be paid electronically if you have provided direct deposit information to the IRS on your 2018 or 2019 tax returns.
The payments will be made between now and December 31, 2020. In many cases, it will be paid electronically if you have provided direct deposit information to the IRS on your 2018 or 2019 tax returns. In the event the IRS does not have an individual’s direct deposit information, a web-based portal is being developed by the Treasury to provide banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.
Qualified Retirement Plans
The 10% penalty for early withdrawals from retirement accounts is removed for coronavirus-related distributions, which are defined to include distributions made on or after January 1, 2020 and before December 31, 2020 to either:
- An individual diagnosed with COVID-19 or whose spouse or dependent is diagnosed with COVID-19;
- An individual who experienced adverse financial consequences as a result of quarantine, lay-off, reduced hours, inability to work due to child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Secretary of Treasury.
An individual taxpayer may receive Coronavirus related distributions during 2020 up to $100,000 and may elect to spread out the income inclusion over a three-year tax period. The taxpayer may then repay the distribution within 3-year period following the distribution and such repayment will be treated as a tax-free rollover.
The CARES Act also stipulates that the limit on loans from qualified plans is increased from $50,000 to $100,000. The loan is limited to the present value of the non-forfeitable accrued benefit of the employee under the plan. The loan limit is increased for a 180-day period starting on March 27, 2020.
Temporary Waiver of Required Minimum Distributions
For calendar year 2020, the Act waives the required minimum distribution rules for certain defined contribution plans and Individual Retirement Accounts:
- A defined contribution plan under section 403(b).
- A defined compensation plan which is an eligible deferred compensation plan under section 457.
- An individual retirement plan.
To incentivize charitable contributions, the CARES Act provides an above-the-line deduction for qualified charitable contributions up to $300 for individuals who do not itemize deductions. A qualified charitable contribution is a charitable contribution which is made in cash to a charitable organization that is not a supporting organization, Donor Advised Fund or a contribution carryover from a prior year. The CARES Act also increases the income limitations on charitable deductions by suspending the 50% AGI limitation for 2020.
Individuals may deduct qualified contributions in 2020 up to 100% of their AGI. Any excess qualified contributions are carried forward to future years in the same manner as other charitable contribution carryovers.
Reynolds + Rowella professionals are closely following the development of COVID-19 relief measures in order to offer insight into the potential impacts on taxpayers. If you have questions about how the CARES Act may affect your personal tax situation, please contact your R+R tax advisor.
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