The CARES Act provides some big wins for individual taxpayers who are in need of an economic lifeline amid the COVID-19 pandemic.
Recovery Rebate for Individual Taxpayers
The CARES Act includes a provision offering a one-time “2020 recovery rebate” of $1,200 ($2,400 for married couples), plus an additional $500 per child for eligible taxpayers. U.S. taxpayers with income up to $75,000 for single filers (phased out at $99,000) and up to $150,000 for married couples (phased out at $198,000) are eligible to receive the rebate.
For most people, there’s no action required to receive the rebate, as the IRS will base it off of the taxpayer’s most recently filed tax return (2019 if filed, or 2018 if the taxpayer has not yet filed last year’s return) or Social Security statement. Once the amount is determined, it will be directly sent to the recipient or directly deposited into a specified account.
The rebate is treated like an advance payment of a refundable tax credit. The amount of the actual credit will need to be recomputed on each taxpayer’s 2020 tax return.
There are a couple of variables to consider in calculating this rebate. One, 2019 was not the year of a global outbreak. For most taxpayers, wages were not affected last year. However, their wages may be affected in 2020. So, if a taxpayer receives a smaller or no advanced rebate now (because they made over the income level in 2019), the rebates will reconcile the differences based on 2020 income levels when returns are filed in the 2020 tax season.
Second, the IRS does not intend to make any clawbacks if an overpayment is made. For example, if a taxpayer ends up bringing in a higher income in 2020, over the threshold amount, they will not be required to return the difference or full amount in such cases.
The 10 percent early withdrawal penalty is waived for taxpayers who take early distributions from their individual retirement accounts. If a qualified taxpayer takes a “coronavirus-related distribution,” he or she may withdrawal up to $100,000 (up from $50,000) from a qualified individual retirement account including a 401(k) plan, 403(b) plan, 457(b) plan, individual retirement account, or individual retirement annuity. The 20 percent withholding requirement on these types of distributions does not apply.
Once the money is withdrawn, the amount will still be taxed, but it will be spread out over three years. If a taxpayer wishes to redeposit the funds back into their retirement account, there is the option to roll it back over within the three-year period without affecting retirement caps.
One caveat is that a coronavirus-related distribution is not considered an eligible rollover and cannot be contributed to a different retirement account when and if paid back.
The CARES Act also waives required minimum distributions (RMDs) for retirees in 2020. Since RMDs are calculated based the prior year’s account balance, retirees would be taking RMDs and calculating taxes owed on accounts that may have fluctuated in the volatile market.
RMDs are suspended from defined contribution plans including 401(k) plans and IRAs, but the waiver does not apply to defined benefit plans.
The CARES Act expanded the access and accessibility of unemployment insurance for those who were laid off due to a business impacted by the coronavirus outbreak. The provision offers an additional $600 per week for up to four months. It also includes payouts for self-employed individuals, independent contractors, and freelancers. The federal government also vowed to fund an additional 13 weeks of unemployment benefits (through December 31, 2020) after the state benefits have ended.
In 2020, taxpayers who itemize will not be subject to the 60 percent limitation of adjusted gross income for charitable contributions. This limitation is temporarily suspended, only applies to 2020 tax returns, and does not include contributions to donor-advised funds.
Taxpayers who do not itemize may be eligible to take an above-the-line deduction for up to $300 for charitable contributions made this year.
The stimulus package includes a provision that allows certain employer payments of student loans to be repaid on behalf of the employee on a tax-free basis. It states that an employer can contribute up to $5,250 annually toward student loans, and the payments would be excluded from the employee’s income.
Payments made by an employer on behalf of the employee will be made tax free between the date of enactment and before January 1, 2021.
If you have any questions regarding the above snapshot on the CARES Act for individual taxpayers, please contact me at firstname.lastname@example.org or (805) 963-7811. I’m happy to help in any way that I can.