WOLF & CO Insights CARES Act: Individual Tax Provisions

CARES Act: Individual Tax Provisions

Individual Recovery Rebate/Credit

Eligible individuals are allowed a 2020 income tax credit equal to the sum of $1,200 ($2,400 for eligible individuals filing a joint return), plus $500 for each qualifying child. The credit is phased out for taxpayers at the following levels of adjusted gross income (AGI):

Filing Category Phase-out begins at AGI in excess of: Fully phased-out at AGI of:
Married Filing Joint $150,000 $198,000
Single/Married Filing Separate $75,000 $99,000
Head of Household $112,500 $146,500

While the package will be accounted for as a 2020 credit, checks will soon be going out to eligible individuals via an advanced rebate of the credit. The IRS will use the last filed tax return of taxpayers to determine who will be receiving an advanced rebate. Any funds received in 2020 as part of this provision will reduce dollar for dollar (but not below zero) the refundable tax credit available in 2020. Any individuals who receive a rebate that is less than the credit to which they are entitled for 2020, will be trued up via a tax credit when they file their 2020 return. If the advanced rebate received is greater than the credit to which an individual is entitled to, they will not have to pay back the excess.

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 the IRS.

RMD Requirement Waved for 2020

Generally, a retirement plan owner or IRA owner must take required minimum distributions (RMDs) upon reaching the age of 72. This requirement has been waived for 2020 for defined contribution plans and IRAs.

Excess Business Loss Limitation is Modified

Under the Tax Cuts and Jobs Act of 2017, business losses for certain taxpayers were limited to gross trade or business income plus $250,000 (or $500,000 for married filing joint taxpayers).  Excess losses were to be carried forward to future years as a net operating loss. The CARES Act eliminates this limitation for tax years 2018, 2019, and 2020, allowing for the full deduction of excess losses in the year incurred.

$300 Above-the-Line Charitable Deduction

Individuals that do not itemize their deductions are eligible to claim up to $300 of charitable deductions in 2020, on top of the standard deduction.

Modified Limitations on Cash Charitable Contributions during 2020

The 60% AGI limitation on cash contributions to 501(c)(3) organizations is suspended for 2020. This provision does not apply to cash contributions to private foundations and donor advised funds.

Relief from 10% Additional Tax on Coronavirus-related Retirement Plan Distributions

Early distributions from retirement accounts, up to $100,000, will not be subject to the additional 10% tax provided they are made to a qualified individual, defined as an individual:

  • Who is diagnosed with the virus SARS-CoV-2 or COVID-19
  • Whose spouse or dependent is diagnosed with such virus or disease by such a test
  • Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to such virus or disease (including being unable to work due to lack of child care)

The distribution will be subject to regular income tax and will be treated as if distributed ratably over three years, unless the taxpayer elects to pay the income tax in the year of the distribution.

Any coronavirus-related distribution taken from an eligible retirement plan can be contributed back to an eligible retirement plan within three years of the distribution.

Tax-excluded Education Payments by an Employer Temporarily include Student Loan Repayments

An employer is allowed to pay up to $5,250 of an employee’s education expenses tax-free to the employee. Historically, qualifying expenses have included tuition, fees, books, supplies, and equipment. The CARES act provides that student loan repayments made before January 1, 2021 now also qualify. The student loan repayments can be made either directly to the employee or to the lender on principal and/or interest for any qualified higher education loan. Student loan repayments paid for by an employer and not included in a taxpayer’s gross income are not eligible for the student loan interest deduction.