COVID-19 stimulus package offers relief to affected individual taxpayers 4/1/2020
To help mitigate the financial and health crises related to the coronavirus (COVID-19), on Friday, March 27, 2020, President Trump signed into law the largest economic relief package in modern U.S. history. The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is intended to shore up the country on multiple fronts and includes several components aimed at individuals.
Recovery Rebates for Individuals: One of the aspects receiving the most attention is the CARES Act’s so-called “recovery rebates.” Eligible individuals will receive a tax credit toward tax year 2020 in the amount of $1,200 ($2,400 if married filing jointly) plus $500 per qualifying child. This 2020 tax credit will be advanced to taxpayers based upon information in their 2019 tax return, 2018 tax return if their 2019 tax return is not yet on file, or Social Security Benefits Statements. The IRS has indicated that people who typically do not file a tax return will NOT need to file a tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax. The credit will begin phasing out once the taxpayer’s adjusted gross income exceeds $150,000 for married filing joint returns, $112,500 for head of household filers, and $75,000 for all other filers. The Treasury plans to direct deposit these advance payments electronically using the bank account information on file from previous tax returns. Taxpayers who qualify but do not have bank account information on file should expect to receive a check in the mail. However, per IRS News Release 2020-61, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail. Notices will be mailed to each eligible individual’s last known address within 15 days of payment providing payment information and a phone number for assistance resolving any issues.
Penalty-Free Early Retirement Distributions: The CARES Act waives the 10% early distribution penalty for COVID-19-related withdrawals from IRAs, 401(k) plans and certain other retirement plans made on or after January 1, 2020, and through December 31, 2020. The waiver applies to distributions made to an individual:
• Who’s diagnosed with COVID-19,
• Whose spouse or dependent is diagnosed with COVID-19, or
• Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care because of COVID-19, or the closing or a reduction of hours of a business owned by the individual due to COVID-19.
Eligible individuals can withdraw up to $100,000 penalty-free. They can repay withdrawn funds within three years of the day after the distribution without regard to the applicable cap on annual contributions. While these qualifying distributions are penalty free, they are not tax free. As such, any distribution required to be included in gross income will, by default, be included in taxable income ratably over a 3-year period beginning in 2020. The taxpayer may elect to include the entire amount in gross income in the year of the distribution.
Waived required minimum distribution rules: The CARES Act similarly waives the required minimum distribution (RMD) rules for certain defined contribution plans and IRAs for calendar year 2020. This will help individuals avoid a financially imprudent sale of retirement assets during the stock market downturn.
The waiver covers both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.
Above the Line Charitable Contribution Deduction: Beginning in 2020, individuals who do not elect to itemize deductions will be allowed an above the line deduction for cash contributions up to $300 made to a qualifying charity. Contributions to donor advised funds or private foundations do not qualify. This provision is a permanent addition and not limited only to calendar year 2020.
2020 Charitable Contribution Limit Increase: The deduction for qualified contributions made during calendar year 2020 previously limited to 60% of AGI can now be deducted up to 100% of AGI. A qualified contribution for purposes of this revision is a cash contribution made during calendar year 2020 to a qualifying charity. The cash contribution cannot be made to a donor advised fund or private foundation. In the event the 2020 qualified contribution exceeds 100% of AGI the excess is carried over to for up to 5 years.
Student loan relief: Under the CARES Act, employers can provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The payment can be made to the employee or the lender. (The employee can’t take a student loan interest deduction for any loan payment for which the exclusion is available.)
The law also allows individuals to stop making payments on federal student loans through September 30, 2020, without incurring penalties or late fees. In addition, no interest will accrue on federal student loans during this period. Further, the government is temporarily suspending garnishments to collect on federal student loans.
Expanded Unemployment Benefits: The CARES Act increases unemployment compensation benefits significantly, providing an extra $600 per week for up to four months, over and above state unemployment benefits. The expansion generally applies to those who can’t work as a direct result of COVID-19.
The law generally provides temporary full federal funding of the first week of unemployment benefits through December 31, 2020, for states that opt to pay recipients as soon as they become unemployed, rather than requiring a one-week waiting period. Further, it provides an additional 13 weeks of unemployment benefits through year end, generally for those who remain unemployed after state unemployment benefits are no longer available.
The law also creates a temporary Pandemic Unemployment Assistance program through the end of the year. The program generally will extend unemployment benefits to workers who traditionally don’t qualify for them — meaning self-employed individuals, independent contractors, those with limited work histories and others.
The swiftly changing environment
No one knows when the COVID-19 public health emergency will end, or for how long the economic repercussions will linger. We’ll keep you informed on the latest developments and help you plan for a more stable financial future.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice. Please contact Henry & Peters P.C. or other tax professionals prior to taking any action based upon this information.