CARES Act: Tax Relief for Individuals
On March 27, 2020 Congress enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). This legislation contains provisions designed to provide relief to individuals and business. The focus for this advisory is on the tax relief provided to individuals.
Refundable Income Tax Credit
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, which could be a child of the taxpayer or other qualifying relative. Each individual who qualified in 2019 will be treated as having made a tax payment in the amount of the credit, which will reduce the amount of 2019 federal income tax liability and create a potential refund that the CARES Act directs to be processed as rapidly as possible.
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: (1) $150,000 for a joint return; (2) $112,500 for a head of household; and (3) $75,000 for all other taxpayers. For example, the credit is completely phased out at $198,000 of AGI for a joint filer with no dependents.
The IRS may pay the credit electronically to any account to which the taxpayer authorized on or after January 1, 2018 for the delivery of a refund of federal taxes or other federal payment. Within 15 days after distributing a rebate payment, the IRS will mail a notice to the taxpayer's last known address indicating how the payment was made, the amount of the payment and the IRS phone number for reporting any failure to receive the payment.
Retirement Account Distributions, Loans and Required Minimum Distributions
The rules for distributions and loans from retirement accounts have been relaxed to permit individuals access to their retirement funds for a wide variety of reasons related to COVID-19. Qualifying taxpayers are those who certify to the plan administrator that one or more of the following circumstances has occurred:
The individual has been diagnosed with the virus SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC);
The individual's spouse or dependent has been diagnosed with such virus or disease by such a test; or
The individual experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
Any distribution of up to $100,000 made on or after January 1, 2020 and before December 31, 2020 from a qualified retirement account (e.g., a 401(k), IRA, certain deferred compensation plans, or other tax-deferred retirement plan) made by a qualifying individual will not be subject to the 10 percent early withdrawal penalty. In addition, the distribution will be subject to federal income tax ratably over the three tax years following the distribution and those distributions can be contributed back to the retirement plan any time during the three-year period beginning on the day after the distribution was received.
The amount of loans that may be taken from such a retirement account has been increased, and if the due date for any repayment of an outstanding loan falls after enactment of the CARES Act and before January 1, 2021, then that due date is deferred by one year.
Lastly, the CARES Act also waives the requirement that qualifying plans make their required minimum distributions during calendar year 2020. This is great news to retirees whose required minimum distribution amount for 2020 was calculated based on the value of the market at December 31, 2019.
The CARES Act has also expanded the charitable contribution deduction for both individual and corporate taxpayers if those donations are made in cash during 2020 to 501(c)(3) charities (except supporting organizations, which carry out their exempt purposes by supporting other charities, and donor advised funds) [qualified contributions].
First, a $300 above-the-line deduction has been added so individuals who do not elect to itemize their deductions can deduct qualified contributions made in 2020.
Second, the 60 percent of AGI limitation on charitable contribution deductions for individuals is increased to 100 percent of AGI for qualified contributions, and the 10 percent taxable income limitation on charitable contribution deductions for corporations is increased to 25 percent of taxable income for qualified contributions. Any qualified contributions by an individual or corporation in excess of the new limit can be carried forward under the normal rules.
In addition, the limitation on charitable contribution deductions for donations of food inventory to a charitable organization that will use it for the care of the ill, the needy or infants is increased. Such donations are generally deductible in an amount up to basis plus half the gain that would be realized on the sale of the food (not to exceed twice the basis).
In the case of a C corporation, the deduction generally cannot exceed 15 percent of the corporation's income. In the case of a taxpayer other than a C corporation, the deduction generally cannot exceed 15 percent of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer's charitable deductions for the year. For 2020, those limitations are increased to 25 percent.
Student Loan Repayments
Generally, an employee's gross income does not include up to $5,250 per year of employer payments, in cash or kind, made under an educational assistance program for the employee's education (but not the education of spouses or dependents). The CARES Act adds eligible student loan repayments made before January 1, 2021 to the types of educational payments that are excluded from employee gross income.
Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education loan for the education of the employee (but not of a spouse or dependent). The payments are subject to the overall $5,250 per employee limit for all educational payments.