(CARES) Act: Individual Tax Payments and Provisions

By Jennifer Kobylarz, CPA, MST

Direct Payments

The CARES Act provides for immediate direct payments to certain individuals. The Act has authorized payments of $1,200 per individual, $2,400 per married couple, with an additional $500 per qualifying child based on filed 2019 tax returns. If a 2019 tax return has not yet been filed, the IRS will base the payments on the filed 2018 tax return.

Payments will be phased out based on 2020 adjusted gross income (meaning that some taxpayers may owe back some or all of the payment received if their income is substantially more in 2020 than it was in 2019 or 2018). Phaseouts will begin at $75,000 for single filers, $112,500 for Head of Household filers, or $150,000 for joint return filers. The phase out is equal to 5% of Adjusted Gross Income (AGI) in excess of the thresholds, therefore making the total phase out limits equal to $198,000 for joint filers.

Payments are expected to be made within 3 weeks but no later than December 31, 2020. The IRS is required to provide written notice to the taxpayer with information on how the distribution was made and provide an IRS contact person to report missing payments. The notice will be sent to the taxpayers last known address within 15 days of the distribution being made.

Retirement Distribution Penalty Relief

Should a taxpayer need to take a distribution from a qualified retirement plan due to any of the below reasons, the 10% early withdrawal penalty will be waived.

  1. Taxpayer is officially diagnosed with Covid-19;
  2. Spouse is officially diagnosed with Covid-19;
  3. Dependent is officially diagnosed with Covid-19; or
  4. Taxpayer experiences adverse financial consequences due to the pandemic (i.e. has been quarantined, laid off, worked reduced hours, etc.).

The waiver of penalties will only apply to the first $100,000 of coronavirus related distributions.

Taxpayers will have three-years to repay distributions taken for coronavirus related expenses instead of the normal 60-day period. The Act will treat the three-year period as the normal 60-day tax-free roll over period.

The Act furthers increases the allowed amount of funds that can be borrowed from an employer sponsored retirement plan to $100,000 and removes the limitation for the loan to be no more than one-half of the account balance. Note that the loan does not have to be for Coronavirus related expenses.

The Act provides for a one-year waiver of the payment of required minimum distributions (RMDs) from defined contribution plans and IRAs. The waiver applies to both 2019 RMDs required by April 1, 2020, and RMDs that would have been otherwise required for 2020. Because the Act waived RMD payments from IRAs and defined contribution plans for 2020, a taxpayer may rollover any such RMDs received in 2020 to an IRA or other qualified employer plan. The 60-day rollover rule will apply, however, subject to future IRS guidance.  

Charitable Contributions

The Act includes charitable contribution incentives for individuals who itemize, those who do not itemize, and for corporations. The contribution must be a contribution of cash made to a public charity, a private operating foundation, or a flow-through private foundation. Further the Act increases the limitation for the enhanced deduction for food inventory to 25% of AGI.

Individuals who are unable to itemize will be permitted to take an above-the-line deduction of $300 on their 2020 tax return for qualified donations.

Individuals who itemize may deduct qualified contributions up to 100% of their 2020 AGI. Individuals will apply the standard AGI limitations for non-qualified contributions first and then utilize the 100% of AGI limitation for qualified contributions. If an individual has more qualified donations than can be taken in 2020, the remainder is carried forward.

Corporations may deduct qualified contributions up to 25% of the taxable income. The standard 10% limitation is applied first to non-qualified contributions before utilizing the qualified contributions. Excess contributions are carried forward.

The Act does require a taxpayer to make an election to treat contributions as qualified. In the case of contributions made by a partnership or S-Corporation, the partner or shareholder must make the election.

Student Loan Relief

The Act provides approximately 95% of student loan borrowers the ability to defer student loan payments for six months without penalty to the borrower for all federally owned loans.

Modification of Loss Limitation Rules

In 2018, taxpayers became subject to the new Excess Business Loss (EBL) Limitation rules. These rules limited taxpayers with significant business losses from taking more than $250,000 (single filers) or $500,000 (joint filers). Any losses limited under this rule were carried forward to 2019 as a Net Operating Loss.

Under the Act, the effective date of the EBL limitations is retroactively changed to December 31, 2020. Additionally, the Act made technical corrections to the definition of excess business losses by excluding wages and capital losses from the computation.

This change takes place immediately and impacts both 2018 and 2019 tax return. Those who were impacted by this rule on their 2018 tax return can file an amended return to claim those losses. Those who would have been impacted by this rule on their 2019 tax return will be allowed to deduct the losses as if the EBL rules did not exist in the first place.

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