What's in the CARES Act? Part One - Individual Tax Provisions
Update: On April 10, IRS launched a new tool to help non-filers provide information so they can receive Economic Impact Payments.
Update: In response to criticism of IRS' March 30 notice, Treasury Secretary Mnuchin announced late April 1 that the IRS would not require seniors who had not filed returns in 2018 and 2019 to file a "simple return" to claim their economic impact payment.Stay tuned for further details!
Update: Late day, March 30, 2020, IRS posted a web page providing our first information on what IRS is calling "economic impact payments." On this page, IRS states that those who did not file a return in 2018 or 2019 must file a "simple tax return" to receive an economic impact payment. The notice states that the IRS COVID-19 website will soon provide information instructing people in these groups on how to file a 2019 tax return with simple, but necessary, information including their filing status, number of dependents and direct deposit bank account information. IRS also states that it plans to create a web portal into which those for whom IRS has no direct deposit information can provide that information. Stay tuned and keep checking IRS.gov/coronavirus.
On Friday, March 27, 2020, the President signed into law H.R. 748, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act contains a number of relief provisions—including tax provisions—designed to sustain Americans during the COVID-19 health and economic crisis. The law is complex, but this post provides an overview of key individual tax provisions included in the law. Other posts detail the business tax provisions, as well as special provisions expanding small business loans (Paycheck Protection Program)..
Rebates for Individuals (§ 2201)
The most wide-reaching provision in the law provides “2020 recovery rebates for individuals.” These rebates, which are characterized as credits against 2020 taxable income, will be issued in the amount of $1,200 for “eligible individuals” or $2,400 for “eligible individuals” filing a joint return. In addition, “eligible individuals” will receive $500 for each “qualifying child,” as defined by IRC § 24(c), for purposes of the child tax credit. This generally includes dependent children under the age of 17 for whom the individual has a social security number.
“Eligible individuals” include “any individual” except for:
- Nonresident alien individuals
- Individuals who can be considered a dependent of another individual
- An Estate or Trust
AGI Phaseout
The amount of the recovery rebate credit is reduced by five percent of the amount by which a taxpayer’s adjusted gross income exceeds $150,000 for joint return filers, $112,500 for those filing head of household, or $75,000 for other taxpayers.
The recovery rebate is to be “treated as allowed” as a refundable tax credit.
Note: Although called a “credit against 2020 taxable income,” recovery rebate credits are wholly refundable credits for which no taxable income is required.
Determining the Recovery Rebate Amount
To allow IRS to efficiently determine the amount of the recovery rebate credit for each individual and pay that amount quickly, the law defines an “advance refund amount.” This is the amount of the recovery rebate credit that the Treasury Department will distribute to taxpayers “as rapidly as possible.” The “advance refund amount” is the amount that would have been allowed as a credit to that individual in 2019 had the recovery rebate credit been part of the law in 2019. In the case of an individual who has not filed a tax return for 2019, the Secretary may substitute taxable year 2018 for taxable year 2019. In other words, if no 2019 return is on file, the “advance refund amount” is the amount that would have been allowed as a credit to that individual in 2018 had the recovery rebate credit been part of the law in 2018. If an individual did not file a return in 2018 or 2019, the Secretary may use information for the individual’s 2019 calendar year provided in that person’s Social Security Benefit Statement or Social Security Equivalent Benefit Statement. The law states that those who were “eligible individuals” for the 2019 taxable year (or the 2018 taxable year if the 2019 return has not been filed) are treated as having made a tax payment in the amount equal to the “advance refund amount” for that taxable year.
Advance Refund Payments
The Treasury Department is instructed to distribute to taxpayers “as rapidly as possible” an advance refund of the recovery rebate credit. The law directs that the Secretary may certify and disburse the advance refund payments electronically to an account to which the payee has authorized, on or after January 1, 2018, the delivery of a tax refund. If direct deposit is not available, the IRS will mail a check to the address on record. No interest is allowed on any overpayment attributable to these advance rebate payments. Within 15 days of the date the advance refund payment is distributed, notice of the payment shall be mailed to the taxpayer’s last known address.
Reconciling the Advance Refund Payment and the Recovery Rebate Credit
The law states that when filing the 2020 return, the amount of the 2020 recovery rebate credit will be reduced (but not below zero) by the aggregate refunds and credits made or allowable to the taxpayer through an advance refund payment. With joint filers, half of each credit is treated as made or allowed to each individual.
Considerations
The statutory language provides that if the advance refund payment sent to the taxpayer was more than the 2020 recovery rebate credit calculated at the time the 2020 return is filed, the taxpayer will not be required to repay the difference. If, however, the taxpayer is entitled to a higher credit using actual 2020 data, the taxpayer will be entitled to recover the difference as an offset against 2020 tax liability or as a refundable credit. It thus appears that the provision is very taxpayer friendly. If 2019 income does not limit the credit, but 2020 income would, the taxpayer will receive the full credit. Conversely, if 2019 income would have limited the credit, but 2020 income does not, the taxpayer may claim the full credit when filing the 2020 return. This may also mean that some taxpayers might fare better if they have not filed a 2019 return, while others will fare better if they have.
IRS guidance will clarify these issues. It is clear that taxpayers will not be disadvantaged when a new child is born in 2020. They will receive a $500 credit for that child when they file their 2020 return. It is not clear, however, how IRS will calculate the advance refund payments for qualifying children who “aged out” of the system in 2019 or 2020. It does appear, however, that if the IRS does make a $500 payment for a child who turns 17 in 2020, the taxpayer will not be required to repay that amount.
Special Rules for Use of Retirement Funds (§§ 2202, 2203)
Penalty-Free Distributions
Section 2202 of the CARES Act provides that a taxpayer may take up to $100,000 in distributions from a qualified retirement plan without being subject to the 10 percent penalty imposed by IRC § 72(t) if that distribution is “coronavirus-related.”
This includes distributions made on or after January 1, 2020, and before December 31, 2020, to:
- individuals diagnosed with COVID-19,
- individuals whose spouse or dependent was diagnosed with COVID-19, or
- individuals who experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due the virus, being unable to work due to the lack of child care due to the virus, or closing or reducing hours of a business owned or operated by the individual due to the virus.
An individual receiving such a distribution may repay it within three years. In addition, the taxpayer may include the income from the distribution in gross income ratably over a period of three years.
Retirement Plan Loans
The law also relaxes the rules for loans from qualified plans, including temporarily increasing the loan limit from $50,000 to $100,000 and delaying repayment dates for some outstanding loans by one year.
Waiver of RMD Requirements
Section 2203 of the law temporarily waives Required Minimum Distributions for calendar year 2020 for a number of retirement plans and individual retirement accounts.
Charitable Contribution Provisions (§§ 2204, 2205)
Allowance of partial above-the-line deduction for charitable contributions
Section 2204 of the CARES Act provides that taxpayers who do not itemize deductions may take an above-the-line deduction on their 2020 return for qualified charitable contributions in an amount not to exceed $300.
Modification of limitations on charitable contributions
Section 2205 of the CARES Act temporarily suspends the 60 percent AGI limit for cash charitable contributions that can be deducted by individuals. In 2020, individuals may deduct qualified contributions in an amount up to 100 percent of AGI. The deduction limit for cash charitable contributions for corporations is increased for 2020 from 10 percent of taxable income to 25 percent of taxable income for qualified contributions. Qualified contributions do not include contributions to a donor advised fund. The law also provides that a corporation can take a deduction in amount up to 25 percent of taxable income for donations of food inventory to charitable organizations in 2020. The food must be used for the care of the ill, needy, or infants. The usual deduction limit for these contributions is 15 percent.
Exclusion for Certain Employer Payments of Student Loans (§ 2206)
Current law allows an employee to exclude from income up to $5,250 of employer payments made under an educational assistance program for the employee’s education. Section 2206 of the CARES Act allows student loan repayments by an employer to be included in qualifying payments under an educational assistance program. In other words, an employee can exclude from income up to $5,250 of student loan payments made on his or her behalf by an employer if no other educational assistance was provided. Employees may not also take a deduction for the interest on those payments.
Note: This tax relief is in addition to student loan forebearance provided to federal student loans in other sections of the CARES Act. Federal student loan payments have been suspended through September 30, 2020, and the interest rate has been temporarily set to zero on a number of federal loans. Students can continue to make payments during this time.