CARES ACT – Individual Tax Relief
4.13.20 | Client Alert – COVID-19 Update
The Coronavirus Aid, Relief, and Economic Security (CARES) Act recently enacted by Congress contains multiple tax-related provisions designed to assist individuals with mitigating the impact of the COVID-19 pandemic. This article is intended to outline the key provisions that individuals should be aware of.
Recovery Rebate and Advanced Refunds for Individuals
The CARES Act includes a recovery rebate provision for low and middle-income individuals, providing cash payments of up to $1,200 ($2,400 for joint filers), plus $500 per child (under 17). The rebates are expected to be received by eligible individuals in the coming weeks, and will come in the form of checks or electronic payments to bank accounts. Those eligible for the full credit are individuals with adjusted gross income (AGI) up to $75,000 for single filers, $112,500 for head of household, and $150,000 for joint filers. The amount of the rebate is reduced by 5 percent of the taxpayer’s AGI that exceeds income thresholds, with complete phase-out occurring at $99,000 for single filers, $136,500 for head of household filers, and $198,000 for joint filers.
For most taxpayers, no action is required to receive the rebate. The IRS will calculate the credit based on the taxpayer’s 2019 income tax return (if filed), or alternatively the 2018 tax return. In order to receive the rebate, the tax return must have included the social security numbers for the taxpayer, their spouse and children (or adoption taxpayer identification number). The IRS will deposit the rebate directly into the same bank account reflected on the return filed. In the coming weeks, the IRS plans to develop a web-based portal for individuals to provide their banking information to the IRS online. Individuals who did not include their banking information on their 2019 or alternatively, their 2018 returns may use this portal to provide the IRS with their banking information. Nonresident aliens, those claimed on another taxpayer’s return, an estate or trust are not eligible for the recovery rebate.
Waiver of 10% Penalty for Early Retirement Withdrawals
The CARES Act provides for up to $100,000 of early retirement plan withdrawals between the period of January 1, 2020 and before December 31, 2020. Coronavirus-related retirement distributions are exempt from the usual 10% penalty for early distributions. A coronavirus-related distribution is made from a qualified retirement plan to an individual: (1) who is diagnosed with SARS-CoV-2 or COVID-19; (2) whose spouse or dependent is diagnosed with such virus; or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual, or other factors as determined by the Secretary of the Treasury. Plan administrators, in determining whether a distribution is coronavirus-related, may rely on an employee’s certification that the employee satisfies the conditions for receiving such distributions.
The income inclusion of coronavirus-related distributions will be spread evenly over a 3-year period, unless the taxpayer elects otherwise. The individual may repay such distribution at any time during the 3-year period beginning on the day after the distribution is received, in 1 or more payments. Such repayment contribution(s) will be treated as if the individual received a nontaxable rollover distribution and will not affect the contribution limit for that year.
Similar to past disaster relief provisions, it appears the inclusion of the coronavirus-related distribution in a taxpayer’s income would begin over a 3-year period in the year received, and if the distribution is repaid within the 3-year repayment period, the individual may file an amended income tax return (or returns) to claim a refund of tax paid attributable to the amount of the distribution previously included in income.
Increase in Limit on Loans not Treated as Retirement Distributions
Prior to enactment of the CARES Act, qualified employer retirement participants could borrow up to the lesser of $50,000 or 50% of their vested retirement plan benefits, which were subject to a 5-year repayment period. For the period starting March 27th through 180 days thereafter (September 23, 2020) the cap on loans from qualified employer plans to participants has increased to $100,000. The repayment period for such loans with due dates between March 27, 2020 and December 31, 2020 is delayed for 1 year. Repayments of such loans will be adjusted for delay in the due date and interest will continue to accrue during the delayed repayment period. Calendar year 2020 will be disregarded for purposes of the 5-year repayment period.
Temporary Waiver of Required Minimum Distribution Rules
To mitigate investment losses faced by individuals subject to required minimum distributions (RMD’s) from qualified retirement plans, the CARES Act waives the RMD for calendar year 2020. The waiver applies to both individuals and beneficiaries of inherited qualified retirement plans. If the RMD for 2020 has already been withdrawn, the recipient may recontribute the RMD within 60 days and it will be considered a nontaxable rollover. However, the CARES Act does not modify the rule allowing only one rollover per calendar year, therefore if a rollover occurred earlier in the year, the RMD will be ineligible to be recontributed.
Beneficiaries of certain inherited retirement plans are required to withdraw the fund investments over a 5-year period. If such a beneficiary forgoes the RMD for 2020, the Cares Act determines the 5-year period without regard to calendar year 2020, thereby extending the distribution period to 6-years.
It is currently not clear if an RMD taken in 2020 that exceeds the 60-day rollover period can be recontributed as a tax-free rollover contribution. Historically, similar relief provisions have been accompanied by guidance allowing an RMD to be rolled over within a certain date and takes the character of a 60-day rollover tax free distribution.
In order to stimulate additional cash available to qualified charities, beginning in calendar year 2020, taxpayers that do not itemize deductions may deduct up to $300 of cash contributions. This charitable provision is in addition to a taxpayer’s standard deduction. Prescribed qualified charities under this provision exclude private foundations and donor advised funds (DAF). This deduction is available beginning tax year 2020.
For those taxpayers who itemize deductions, the CARES Act temporarily suspends the 60% adjusted gross income limit on charitable contributions for the 2020 tax year. This only applies to cash donations made in 2020 to qualified charities. The deductible amount of charitable contributions is limited to the taxpayer’s contribution base less other allowable charitable contributions that are not covered by the CARES Act. The contribution base is equal to Adjusted Gross Income (AGI) without regard to any net operating loss carrybacks. Excess 2020 cash charitable contributions are carried forward for 5 years.
For corporations, the 2020 taxable income limit on charitable contributions has increased from 10% to 25%. For contributions of food inventory, the deduction against taxable income has increased from 15% to 25%.
The temporary suspension of 60% AGI limits for charitable contributions is specific to 2020 cash donations and therefore would not result in freeing up pre-2020 carryover cash contributions that were originally subject to AGI limits.
Exclusion for Certain Employer Payments of Student Loans
The CARES Act expands the types of employer provided education assistance that an employee may exclude from his or her gross income to student loans paid by the employer for the period March 27, 2020 through December 31, 2020. Prior to the amendments to the Internal Revenue Code provided by the CARES Act, an employee may only exclude certain employer-provided education expenses and courses of instruction. An employee may now exclude up to $5,250 of an employer’s payment of such employee’s qualified education loan. Generally, the student loan may include expenses for:
- Tuition, equipment, materials, or supplies required of all students in the same course of study;
- Books, transportation, and miscellaneous personal expenses, including a reasonable allowance for the rental or purchase of a computer; and
- Room and board.
The payments can only be toward loan(s) where the employee is the debtor and such loan(s) were incurred for the employee’s own education. The payments may be made to the employee or the lender.
The change to this provision does not affect the working condition fringe benefit in §132, which provides for a different and more favorable treatment for certain education reimbursements.
For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon Advisor.
Berdon LLP New York Accountants