Individual Tax Relief Provided by the CARES Act

You may be wondering about some of the recent tax changes meant to help everyone coping with the Coronavirus fallout.  We know you have been inundated with information over the last two weeks, but it is important to have an understanding of how the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, may impact you.  In an effort to “keep it brief,” below we have summarized the individual tax provisions of the CARES Act.

Recovery Rebates for Individuals.  The government is sending up to $1,200 payments to eligible taxpayers and $2,400 to married couples filing joints returns.  An additional $500 payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).  Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $112,500 (head of household), and $150,000 (joint).  There is no income floor or ”phase-in”-all recipients who are under the phaseout threshold will receive the same amounts. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.

The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed).  Rebates are payable whether or not tax is owed.  Individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.

Waiver of 10% Retirement Plan Early Distribution Penalty. The 10% penalty on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a “qualified individual”).  Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA.  The taxable income arising from the distributions is spread out over three years unless the you elect out of the spread out.

Waiver of Required Minimum Distribution Rules.  Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived.  This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

Charitable Deduction Liberalizations. The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

• Even if you don’t itemize your deductions, you can claim a $300 above-the-line deduction for cash contributions made to public charities in 2020.
• Contributions made to public charities in 2020, are no longer subject to the 60% of modified adjusted gross income limitation.  Contributions can be as much 100% of your modified adjusted gross income limitation.

Exclusion for Employer Payments of Student Loans.  An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.

Break for Non-prescription Medical Products.  For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription.  And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.

IRS Information Site.  Ongoing information on the IRS and tax legislation response to COVID- 19, including due dates for tax return filing and payments, can be found at  https://www.irs.gov/coronavirus.  Please take the time to keep yourself informed.

Please call us at any time with questions about the above information or any other matters, related to COVID-19 or not.

We wish all of you the very best in this difficult time.