Key Tax Implications for Individuals in The CARES Act

Key Updates for Friday, March 27: The “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act) has been signed into law by President Trump after passing the House of Representatives on Friday, March 27, after passing the Senate on Wednesday, March 25. Below is a summary of the major individual income tax provisions in the bill.

Key Tax Implications for Individuals in the CARES Act:

  • Individual Recovery Rebate/Credit
  • No 10% additional tax for coronavirus-related retirement plan distributions
  • Required Minimum Distributions Requirement Waived for 2020
  • $300 Above-the-line Charitable Deduction
  • Modification of Limitations on Individual Cash Charitable Contributions During 2020
  • Student Loan Provisions

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1. Individual Recovery Rebate/Credit

Under the CARES Act, eligible individuals will be allowed an income tax credit for 2020 equal to the sum of:

  • $1,200 ($2,400 for eligible individuals filing a joint return) plus
  • $500 for each qualifying child of the taxpayer (as defined under Code Sec. 24(c) for purposes of the child tax credit).

The credit is, in reality, an advance payment, that you would have received on your 2020 tax return. Given the urgent situation with the U.S. economy and the need to get cash to taxpayers to pay bills, etc., Congress chose to get this in your hands right away.

Nonresident aliens and children for whom their dependent exemption is allowable to a parent or other person will not receive a refund. Neither will estates or trusts.

Not everyone will receive the credit. Higher-income taxpayers will not see this credit. The credit is reduced by 5% of the taxpayer’s adjusted gross income (AGI) in excess of:

  • $150,000 for a joint return,
  • $112,500 for a head of household, and
  • $75,000 for all other taxpayers.

IRS will make the payment electronically via direct deposit to your account if that account was authorized on your 2018 tax return (either to receive a federal income tax refund or to make a federal income tax payment)—otherwise the payment will be delivered by mail. Approximately two or three weeks after you get the payment, you should receive an IRS letter indicating how the payment was made, the amount of the payment, and a phone number to call for reporting any failure to receive the payment.

Expect payments to start around the April 15, 2020 time period.

2. No 10% additional tax for coronavirus-related retirement plan distributions

Acceptable reasons for taking the money out of your retirement plan include:

  • You, your spouse, or a dependent is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the CDC;
  • You are experiencing 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.

If you take a premature distribution, it can be contributed back to the retirement plan. Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, may recontribute the amount back to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made.

Whilst the premature distribution is not subject to the 10% penalty, it is subject to normal income tax. Thus, the CARES Act also provides that the distribution will be included ratably in income over three years unless the taxpayer elects not to.

3. Required Minimum Distributions (“RMD”) requirement waived for 2020

The CARES Act provides that the RMD requirements do not apply for calendar year 2020 to a defined contribution or individual retirement plan accounts. The RMD requirements also do not apply to any distribution which is required to be made in calendar year 2020 by reason of:

  • A required beginning date occurring in calendar year 2020, and
  • Such distribution not having been made before January 1, 2020.

4. $300 Above-the-line Charitable Deduction

The CARES Act adds an above-the-line deduction (not to exceed $300) of qualified charitable contributions made by an eligible individual who does not itemize their deductions during the tax year. So if you are unable to itemized your deductions and instead claim the standard deduction, this $300 above-the-line deduction applies to you.

The term “qualified charitable contribution” generally means a charitable contribution made in cash, for which a deduction would normally be allowable, to a qualified charitable organization, but which is not for the establishment of a new, or maintenance of an existing, donor advised fund.

5. Modification of Limitations on Individual Cash Charitable Contributions During 2020

Normally, your charitable contributions are allowed to the extent of 60% of your income. The CARES Act provides that qualified contributions are disregarded in applying the 60% limit. This means that you will be able to make contributions in excess of the normal limit and receive an immediate deduction for it.

6. Student Loan Provisions

The Act suspends student loan payments (principal and interest) through September 30, 2020 without penalty to the borrower for federal student loans. No interest will accrue on these loans during this suspension period.

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