CARES Act – Individual Tax Provisions

Michael Perkins

CARES Act

Individual Tax Provisions

Individual recovery rebate/credit

New law. Credit allowed for 2020. Under the CARES Act, an eligible individual is allowed a refundable income tax credit for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return) plus (2) $500 for each qualifying child of the taxpayer.

Observations: ‐ For purposes of the child tax credit, the term “qualifying child” means a qualifying child of the taxpayer, as defined for purposes of the dependency exemption, who hasn’t attained age 17. ‐ Individuals who have no income, as well as those whose income comes entirely from non‐ taxable means‐tested benefit programs such as SSI benefits, are eligible for the credit and the advance rebate.

Eligibility for credit. For purposes of the credit, an “eligible individual” is any individual other than a nonresident alien or an individual for whom a dependency deduction is allowable to another taxpayer for the tax year.

Observations: ‐ Children who are (or can be) claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent. ‐ An individual who wasn’t an eligible individual for 2019 may become one for 2020, e.g., where the individual was a dependent for 2019 but not for 2020. IRS won’t send an advance rebate to such an individual, because advance rebates are generally based on information on the 2018 or 2019 return. However, the individual will be able to claim the credit when filing the 2020 return.

Phaseout of credit. The amount of the credit is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers.

Observation: Under these rules, the credit is completely phased‐out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500.

Advance rebate of credit during 2020. Each individual who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the advance refund amount for 2019. The “advance refund amount” is the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019.

IRS will refund or credit any resulting overpayment as rapidly as possible. No interest will be paid on the overpayment.

 

If an individual hasn’t yet filed a 2019 income tax return, IRS will determine the amount of the rebate using information from the taxpayer’s 2018 return. If no 2018 return has been filed, IRS will use information from the individual’s 2019 Form SSA‐1099, Social Security Benefit Statement, or Form RRB‐ 1099, Social Security Equivalent Benefit Statement.

Observations: ‐ In other words, even though the credit is technically for 2020, the law treats it as an overpayment for 2019 that IRS will rebate as soon as possible during 2020. ‐ Most eligible individuals won’t have to take any action to receive an advance rebate from IRS.

This includes many low‐income individuals who file a tax return to claim the refundable earned income credit and child tax credit.

IRS may make the rebate electronically to any account to which the payee authorized, on or after Jan. 1, 2018, the delivery of a refund of federal taxes or of a federal payment.

No later than 15 days after distributing a rebate payment, IRS must mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.

No advance rebate will be made or allowed after Dec. 31, 2020.

Advance rebate reduces credit allowed for 2020. The amount of credit that is allowable for 2020 must be reduced (but not below zero) by the aggregate advance rebates made or allowed to the taxpayer during 2020.

Observation: If the taxpayer received an advance rebate during 2020 that was less than the credit to which the taxpayer is entitled for 2020, the taxpayer will be able to claim the balance of the credit when filing the 2020 return. If, on the other hand, the advance rebate received was greater than the credit to which the taxpayer is entitled, the taxpayer won’t have to pay back the excess. That is because the 2020 credit can’t be reduced below zero.

If an advance rebate was made or allowed for a joint return, half of the rebate is treated as having been made or allowed to each spouse who filed the joint return.

Observation: Thus, if taxpayers filed a joint return for 2019 and received an advance rebate, but were divorced or filed separate returns for 2020, each individual will take into account half of the advance rebate when reducing the credit allowed for 2020.

No 10% additional tax for coronavirus‐related retirement plan distributions

Background. A distribution from a qualified retirement plan is subject to a 10% additional tax unless the distribution meets an exception under Code Sec. 72(t).

New law. The CARES Act provides that the Code Sec. 72(t) 10% additional tax does not apply to any coronavirus‐related distribution, up to $100,000.

 

A coronavirus‐related distribution is any distribution (subject to dollar limits discussed below), made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan, made to a qualified individual.

A qualified individual is an individual: 1. Who is diagnosed with the virus SARS‐CoV‐2 or with coronavirus disease 2019 (COVID‐19) by a test approved by the Centers for Disease Control and Prevention (CDC),  2. Whose spouse or dependent is diagnosed with such virus or disease by such a test, or  3. Who experiences 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.

The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of (3) above in determining whether any distribution is a coronavirus‐ related distribution.

Limit on distribution. The aggregate amount of distributions received by an individual which may be treated as coronavirus‐related distributions for any tax year cannot not exceed $100,000.

Distribution can be contributed back to 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, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under the Code.

If a contribution is made with respect to a coronavirus‐related distribution, then, to the extent of the amount of the contribution, the coronavirus‐related distribution is treated as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.

Distribution can be included in income over three years. In the case of any coronavirus‐related distribution, unless the taxpayer elects not to, any amount required to be included in gross income for such tax year will be so included ratably over the 3‐taxyear period beginning with such tax year.

Loans from qualified plans. The CARES Act provides flexibility for loans from certain retirement plans for coronavirus‐related relief.

Effective date. Act Sec. 2202 applies to distributions made on or after January 1, 2020, and before

December 31, 2020.

RMD requirement waived for 2020

Background. In general, Code Sec. 401(a)(9) requires a retirement plan or IRA owner to take required minimum distributions (RMDs) annually once the owner reaches age 72.

New law. The CARES Act provides that the RMD requirements do not apply for calendar year 2020 to: 1. A defined contribution plan described in Code Sec. 403(a) or Code Sec. 403(b);

Page | 4 2. A defined contribution plan which is an eligible deferred compensation plan described in Code

Sec. 457(b) but only if such plan is maintained by an employer described in Code Sec. 457(e)(1)(A); or  3. An individual retirement plan.

The RMD requirements also do not apply to any distribution which is required to be made in calendar year 2020 by reason of:  1. A required beginning date occurring in calendar year 2020, and  2. Such distribution not having been made before January 1, 2020.

Effective date. The amendments apply for calendar years beginning after December 31, 2019. $300 above‐the‐line charitable deduction

Background. Adjusted gross income is gross income less certain deductions. (Code Sec. 62(a))

New law. The CARES Act adds a deduction to the calculation of gross income, in the case of tax years beginning in 2020, for the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the tax year.

For this purpose, the term “eligible individual” means any individual who does not elect to itemize deductions.

The term “qualified charitable contribution” means a charitable contribution (as defined in Code Sec. 170(c)):  1. Which is made in cash;  2. For which a deduction is allowable under Code Sec. 170. 3. Which is made to an organization described in Code Sec. 170(b)(1)(A), and not to an organization described in Code Sec. 509(a)(3); and  4. Which is not for the establishment of a new, or maintenance of an existing, donor advised fund.

Effective date. The amendments apply to tax years beginning after Dec. 31, 2019.

Modification of limitations on individual cash charitable contributions during 2020

Background. Individuals are allowed a deduction for cash contributions to certain charitable organizations (such as churches, educational organizations, hospitals, and medical research organizations) up to 60% of their contribution base (generally, adjusted gross income (AGI)).    If the aggregate amount of an individual’s cash contributions to these charities for the year exceeds 60% of the individual’s contribution base, then the excess is carried forward and is treated as a deductible charitable contribution in each of the five succeeding tax years.

New law. The CARES Act provides that (except as stated below) qualified contributions are disregarded in applying the 60% limit on cash contributions of individuals and the Code Sec. 170(d)(1) rules on carryovers of excess contributions.

 

Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as deductions for the contribution year.

Qualified contributions are charitable contributions if‐‐‐ 1. They are paid in cash during calendar year 2020 to an organization described in Code Sec. 170(b)(1)(A) (i.e., 501(c)(3) and certain other charitable organizations); and 2. The taxpayer has elected to apply this provision with respect to the contribution.

However, contributions to a Code Sec. 509(a)(3) supporting organization or a donor advised fund are not qualified contributions.

In the case of a partnership or S corporation, the election in item (2) above is made separately by each partner or shareholder.

Effective date. The amendments apply to tax years beginning after Dec. 31, 2019.

Tax‐excluded education payments by an employer temporarily include student loan repayments

Background. An employee’s gross income doesn’t include up to $5,250 per year of employer payments, in cash or kind, made under an educational assistance program for the employee’s education (but not the education of spouses or dependents).

New law. The CARES Act adds to the types of educational payments that are excluded from employee gross income “eligible student loan repayments” (below) made before January 1, 2021. The payments are subject to the overall $5,250 per employee limit for all educational payments.

Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education loan for the education of the employee (but not of a spouse or dependent).

To prevent a double benefit, student loan repayments for which the exclusion is allowable can’t be deducted under Code Sec 221 (which allows the deduction of student loan interest subject to a dollar limit and a phase‐out above specified taxpayer income levels.)

Effective date. The amendments apply to payments made after the date of enactment of the Act.

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