In response to the COVID-19 (coronavirus) pandemic and its impact on the economy, the federal government enacted the Coronavirus Aid, Relief, and Economic Relief (CARES) Act (P.L. 116-136). The $2.2 trillion price tag makes this the most expensive act of legislation passed in the history of the United States. The bill provides tax relief and tax incentives to both individuals and businesses. We will present some of the individual provisions of the bill below.
Recovery Rebates to Individuals
Under the CARES Act, individual taxpayers will receive advance refunds of credits against 2020 taxes equal to $1,200 for individuals, or $2,400 for joint filers, plus $500 for each qualifying child. Generally, income tax credits reduce a taxpayer’s income tax liability and are claimed on the tax return for the year in which they may be claimed. However, the government will make advance payments of the credit as soon as possible, with eligibility and credit amounts based on information from 2019 or 2018 tax returns.
These rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross incomes (AGI) over $99,000, heads of household with AGI at or exceeding $136,500, and joint filers with AGI at or exceeding $198,000. Once the credit for an individual phases out, the credit for each qualifying child phases out with each additional $10,000 in AGI over the threshold.
Enhanced Charitable Contributions
In general, the itemized charitable deduction for individuals is limited to a percentage of the taxpayer’s AGI. The percentage is determined by the type of organization receiving the donation and the type of property donated. For the 2020 tax year, individuals can claim an unlimited itemized deduction for charitable contributions, which are normally limited to 50% of AGI.
Beginning in tax year 2020, an individual who does not itemize deductions can deduct up to $300 in charitable contributions made to churches, nonprofit schools, nonprofit medical institutions, and other organizations as an above-the-line deduction in calculating adjusted gross income. This allows an individual to claim a deduction for a charitable contribution even if the individual does not itemize deductions.
Modifications for Net Operating Losses
Under the CARES Act, net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period and an unlimited carryforward period. The general rule limiting an NOL deduction to 80% of taxable income does not apply to NOLs occurring in these years.
Special Rules for Uses of Retirement Funds
Withdrawals
The CARES Act waives the 10% penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. For purposes of the penalty waiver, a coronavirus-related distribution is one made during the 2020 calendar year, to an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus.
Any income attributable to an early withdrawal is subject to tax over a three-year period. Taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.
Required Minimum Distributions
The CARES Act also waives required minimum distributions, regardless of whether the taxpayer has been impacted by the pandemic. The waiver applies for calendar year 2020 to defined contribution plans, certain annuity plans, and traditional or Roth IRAs. The waiver allows seniors to hold on to their plan assets when they might have otherwise had to sell at market lows.
IRA Contribution Deadline
The deadline to make an IRA contribution is extended to July 15, 2020, the extended due date for tax returns this year.
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Please feel free to reach out to us if you have questions about the CARES Act or how it affects you and your family’s tax situation. Realize is fully operational and all staff are available to speak with you about any of your tax concerns. We are here to support you with the best possible client service during these extraordinary times.
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