How Did the CARES Act Affect 2020 Taxes?

In the second of his three-part series on ways in which the 2020 tax form is different from 2019's, Julian Block discusses the CARES Act and its impact on taxpayers. Among other topics, he covers the IRS's rules for retirees and explains how seniors can save some money with qualified charitable distributions.

Mar 18th 2021
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I devoted a previous column to two changes on IRS Form 1040. The first one: changes to educator expenses (line 10 of Schedule 1, Additional Income and Adjustments to Income). The other one: expenses incurred by volunteer workers (line 11 of Schedule A, Itemized Deductions).

Modest incentives for modest contributions. I’ll start this column with the highlights of a change that suspends some of the rules for charitable contributions.

The $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act was approved by Congress and signed by then-president Trump in response to the corona crisis. The CARES Act, enacted in March 2020, includes a provision that helps filers who decide to skip Form 1040’s Schedule A (Itemized deductions) and avail themselves of the standard deduction amounts (Line 12 on page one of the 1040 form.)

It allows nonitemizers to take 2020 deductions of as much as $300 ($150 for married couples filing separate returns) for donations to charities that qualify under Internal Revenue Code Section 501© (3). This wide-ranging category includes philanthropic groups like religious institutions, hospitals, schools, museums, and YMCAs.

Nonitemizers claim the new deduction on Form 1040’s line 10b on page one. What percent of filers are nonitemizers who no longer submit Schedule A with their 1040s? About 90 percent, says the IRS.

What percent of filers were nonitemizers before the Tax cuts and Jobs Act went on the books for 2018 and later years? About 70 percent.

Retirees who use IRA withdrawals to make deductible donations. Long-standing rules require individuals who move money into IRAs and other tax-deferred retirement plans to begin to make annual withdrawals once they reach age 72. (Previously, the starting age for required withdrawals was 70 ½.)

There are lots of seniors who’d like to sidestep withdrawals. Why not? They receive enough from other sources like dividends, interest, pensions, and Social Security benefits.

But an intransigent IRS insists that they can’t. They still must make required minimum distributions (RMDs), which is the IRS’s clunky designation for those yearly subtractions.

How are seniors supposed to determine what their RMDs should be? They get the numbers from outfits like Vanguard and Fidelity that are custodians of their retirement accounts.

How do custodians determine RMDs for 2020? On the basis of: clients’ life expectancies; and the total amount of money in their accounts on December 31 of 2019.

Going in the other direction, does the IRS become upset when seniors want to remove more than their mandated distributions? It couldn’t care less.

A big break for seniors. The law allows them to use some of their RMDs to make deductible donations to schools, hospitals and other qualifying charities. Those kinds of donations, in IRS lingo, are qualified charitable distributions (QCDs), yet another designation that doesn’t roll off the tongue.

The CARES Act allows seniors to skip RMDs for 2020. But seniors who skip RMDs still can make QCDs for 2020. Note, though, that QCDs pass muster only if they go directly from IRAs to charities that seniors select.

Seniors can make QCDs of up to $100,000 to one or more charities and take standard deductions. Also, the law permits a married person’s spouse 70 ½ or over to transfer another $100,000 to charities from his or her IRA. The IRS cautions that a spouse whose QCDs exceed the limit can’t use part of the other spouse’s $100,000.

What’s in it for seniors who make QCDs? While QCDs count towards the RMDs that donors must otherwise receive from their accounts for the year and include in income, the IRS doesn’t tax QCDs. So that’s why QCDs cut taxes on RMDs.

In a subsequent column, I’ll discuss some rules that help or hurt retirees who use IRA withdrawals to make deductible donations.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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