By: Peter Beach
March 30, 2020
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. This article discusses the tax relief provisions for individuals that are contained in the Act.
The bill provides a $1,200 refundable tax credit for individuals ($2,400 for taxpayers filing jointly). In addition, taxpayers with children will receive $500 for each child. The rebate starts to phase out at adjusted gross income of $75,000 for singles, $112,500 for heads of household, and $150,000 for taxpayers filing joint returns at the rate of $50 per $1,000 of income in excess of the phase-out amount. It phases out entirely at $99,000 for single taxpayers with no children and $198,000 for taxpayers filing joint returns with no children.
A taxpayer generally does not need to do anything to claim the rebate. The IRS will calculate the amount of the rebate based on a taxpayer’s 2019 federal income tax return, or the 2018 tax return if the taxpayer has not filed the 2019 tax return and send the payment to the taxpayer. Taxpayers receiving rebates do not have to pay income tax on the rebates.
Access to Retirement Plan Assets
Under current tax law, a distribution from a qualified retirement plan is subject to a 10% additional tax unless the distribution meets a statutory exception. The CARES Act creates an exception to the 10% additional tax for any coronavirus-related distribution, up to $100,000. A coronavirus-related distribution is any distribution made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan made to a qualified individual.
A qualified individual is an individual (i) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (ii) whose spouse or dependent (as defined in Code Sec. 152) is diagnosed with such virus or disease by such a test, or (iii) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury. The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of (iii) above in determining whether any distribution is a coronavirus-related distribution.
Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which the distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of the distribution to an eligible retirement plan of which the individual is a beneficiary and to which a rollover contribution of such distribution could be made. In addition, unless the taxpayer elects not to, any amount required to be included in gross income for such tax year will be included ratably over the 3-taxyear period beginning with such tax year.
The CARES Act also provides flexibility for loans from certain retirement plans for coronavirus-related relief. For a period of 180 days beginning on March 27, 2020, the limitations on loans from tax-qualified retirement plans (including 401(k) plans) and 403(b) plans to qualified individuals are increased from the lesser of $50,000 or 50% of the participant’s vested balance to the lesser of $100,000 or 100% of the participant’s vested balance. Also, loan repayment due dates for qualified participants under qualified retirement plans and 403(b) plans occurring from March 27, 2020 through December 31, 2020 are delayed for one year. The delay period is not considered for applying the five-year maximum repayment term applicable to plan loans.
The CARES Act also waives the required minimum distribution requirement for 2020. In general, the IRC requires a retirement plan or IRA owner to take required minimum distributions annually once the owner reaches age 72. The CARES Act provides that the required minimum distribution requirements do not apply for calendar year 2020 to defined contribution plans (including 401(k) plans, 403(b) plans, governmental 457(b) plans, individual retirement annuities, and individual retirement accounts).
Deductions for Charitable Contributions Expanded
The CARES Act adds a deduction to the calculation of gross income, in the case of tax years beginning in 2020, for the amount (not to exceed $300) of certain charitable contributions made by an individual who does not elect to itemize deductions. Above the line means that the deduction is available in addition to the standard deduction available to taxpayers who do not itemize deductions.
The CARES Act also increases the availability of charitable deductions for taxpayers who itemize their deductions. Prior to the Act, individuals were allowed a deduction for cash contributions to certain charitable organizations up to 60% of their contribution base—generally, their adjusted gross income. If the aggregate amount of an individual’s cash contributions to these charities for the year exceeded 60% of the individual’s contribution base, then the excess was carried forward and treated as a deductible charitable contribution in each of the five succeeding tax years. The CARES Act allows qualified contributions to be deducted up to 100% of the contribution base for 2020, with any excess contributions available to be carried over to the next five years.
Tax-free education payments by an employer temporarily include student loan repayments
An employee’s gross income doesn’t include up to $5,250 per year of employer payments, in cash or kind, made under an educational assistance program for the employee’s education (but not the education of spouses or dependents). The CARES Act adds to the types of educational payments that are excluded from employee gross income eligible student loan repayments made before January 1, 2021. The payments are subject to the overall $5,250 per employee limit for all educational payments. Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education loan as defined in the Code for the education of the employee (but not of a spouse or dependent). To prevent a double benefit, student loan repayments for which the exclusion is allowable can’t be deducted under the existing Code provision that allows the deduction of student loan interest subject to a dollar limit and a phase-out above specified taxpayer income levels.