What Tax Breaks Individuals May See in the New CARES Act
In this two-part article, we will briefly explain some of the key tax provisions affecting each sector.
The new stimulus package passed by Congress in response to the COVID-19 pandemic—the Coronavirus Aid, Relief, and Economic Security (CARES) Act—does much more than provide enhanced unemployment benefits and other forms of financial support. The new law includes a bevy of tax breaks designed to help both individual taxpayers and businesses.This article will primarily focus on what impact the Act has on your individual clients.
The CARES Act provides a wide range of tax benefits for individual taxpayers ranging from personal stimulus rebates to charitable deductions for non-itemizers to relief for 401(k) and IRA participants.
Here are some of the highlights:
Stimulus rebates: By now, most taxpayers are aware if they filed tax returns for either 2019 or 2018 they will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples and up to $500 for each child under age 17. Note: Social Security recipients and railroad retirees who are otherwise not required to file a tax return are also eligible and will not be required to file a return.
But the payment amount is phased out based on the taxpayer’s adjusted gross income (AGI). For single filers, the phase-out occurs between $75,000 of adjusted gross income (AGI) and $99,000. For joint filers, the total phase-out occurs at $150,000 and $198,000 of AGI.
Note: The term “rebate” is a bit of a misnomer. The payments are actually advances of refundable credits that are generally based on the taxpayer’s 2019 tax return if it has been filed or their 2018 return. If no returns have been filed (e.g., for certain retirees), the information will be provided by the Social Security Administration (SSA).
Charitable donations: When catastrophes occur, taxpayers are often inclined to donate funds to charities. However, due to changes in the Tax Cuts and Jobs Act (TCJA), many taxpayers no longer qualify for charitable deductions because they are claiming the standard deduction rather than itemizing. Among other changes, the TCJA essentially doubled the standard deduction and reduced or eliminated benefits of several itemized deductions.
Now the CARES Act authorizes a deduction of up to $300 for non-itemizers who claim the standard deduction. Furthermore, the tax law generally limits charitable deductions for monetary donations to 60 percent of the taxpayer’s AGI, but this cap is removed for contributions made in 2020.
Required minimum distributions: Generally, individuals who have funds in a qualified retirement plan, like a 401(k), or an IRA must begin taking required minimum distributions (RMDs) after reaching a specified age. The recently-enacted SECURE Act changed the starting age from the year after the year the account owner reached age 70½ to age 72, beginning in 2020.
The new law waives this requirement for all RMDs, including inherited accounts, in 2020. It doesn’t matter whether or not the taxpayer has been affected by the pandemic.
IRA rollovers: Usually, distributions from an IRA are subject to tax unless the same amount is rolled over into another IRA within 60 days. This rollover is exempt from tax liability. Now the new law provides more flexibility for IRA owners.
Under the CARES Act, an individual has up to three years to complete a rollover for distributions relating to COVID-19 complications. Similar rules apply to distributions from qualified plans.
Early withdrawals: If a taxpayer withdraws funds from a qualified plan or IRA before age 59½, he or she is assessed a 10 percent tax penalty, in addition to the regular income tax that is owed. However, the Internal Revenue Code contains several key exceptions to this general rule (e.g., distributions made on account of disability). Now there’s another exception to add to the list.
The new law allows an account owner to take COVID-19 related distributions of up to $100,000 in 2020 without incurring the tax penalty. In service distributions from qualified plans are permitted. Note that this may apply to any combination of qualified plan accounts or IRAs.
Retirement plan loans: The CARES Act liberalizes the current tax rules for retirement plan loans made to qualified individuals made between March 27, 2020 and September 23, 2020. Specifically, the new law--
• Increases the maximum loan amount from $50,000 to $100,000; and
• Allows participants to take the full amount of their vested benefit as a loan. Normally, the loan amount is limited to 50% of the vested balance.
The CARES Act also extends the due date for loan repayments that are due between March 27, 2020 and December 31, 2020 for one year as well as extending the maximum repayment period of five years.
Student loans: The CARES Act eases the burden on individuals who are obligated to repay student loans. For 2020, employers may provide up to $5,250 in student loan repayment benefits on a tax-free basis. Therefore, an employer could assist with loan payments and the employee won’t be responsible for any tax on those amounts.
In addition, borrowers can defer payment on qualified loans to September 30, 2020. Congress may subsequently grant an additional extension.
What to Do
Many individuals are clamoring for information about the CARES Act and want to know how these provisions apply to their personal situation. Provide the guidance your clients need during these troubled times.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...