On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, Economic and Security (CARES) Act.
This 880-page legislation provides emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic. We have highlighted the key personal income tax measures in the CARES Act affecting and assisting individuals and families.
Recovery rebate for individuals and families
A recovery rebate credit is available to individuals, married couples filing jointly, and for qualifying children. All U.S. residents with adjusted gross income (AGI) up to $75,000 ($150,000 for married couples), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. For the vast majority of Americans, no action will be required in order to receive a rebate check, as the IRS will use the taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return.
Special rules for the use of retirement plans
Generally, when you take distributions early from a qualified retirement plan or IRA, a 10% penalty may apply unless a penalty exception can be applied. The CARES Act provides that withdrawals not exceeding $100,000 in the taxable year will not be subject to any penalty if the withdrawals are “coronavirus-related distributions.” Briefly, coronavirus-related distributions are for withdrawals made after the date of enactment and before December 31, 2020, and apply to individuals who are diagnosed with the virus SARS-CoV-2 or with COVID-19, whose spouses or dependents are diagnosed with such viruses or diseases, OR who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, have reduced work hours, or are unable to work due to lack of child care, etc.
The special retirement plan rules also provide that a designated distribution may be included (deferred) in income spread equally over a three-year period, rather than reporting exclusively in the year of distribution. Further, the rules provide for a repayment opportunity of amounts distributed. Another feature of the special rules is the permission of loans from a qualified retirement plan up to $100,000. Currently, the maximum loan from a qualified plan is $50,000.
Required minimum distributions for 2020
The CARES Act provides for a temporary waiver of required minimum distribution rules for certain retirement plans and accounts. This provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
Contributions to charitable organizations
First, individuals and families who do not itemize deductions will be permitted to take cash-donated charitable contributions, up to $300, against their income. The cash donations need to be made to certain charities often referred to as “public charities.”
Secondly, when individuals and families donate to charity, itemized charitable deductions are generally limited to various percentages of AGI based on the type of property donated and the type of charity receiving the donation. In 2020, cash contributions to specified charity types (public charities) will not be limited as a percentage of income. This provision does not apply to new or existing Donor Advised Funds or certain charitable supporting organizations. If the cash contribution exceeds income, such excess can be carried forward.
Tax-free employer paid student loan benefit
This provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
Student loan payment relief
The Act provides that certain student loans will not require payments (payments will be suspended) until September 30, 2020. During this period of time, no interest or penalties will accrue.
Please be sure to consult with your tax advisor about how the CARES Act provisions may affect your personal tax plan. To learn about recent legislation regarding tax filing and payment relief, please read Relief for Taxpayers Affected by ongoing COVID-19 Pandemic.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this article is not intended to provide tax advice, in the event that any information contained in this article is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein.