April 2, 2020
There are numerous relief provisions for individual Americans in the Coronavirus Aid, Relief and Economic Security Act or the CARES Act. Below is a summary of them.
REBATES TO INDIVIDUALS
Rebates are available from the Federal Government for up to $1,200 for single individuals and $2,400 for married couples. Additionally a $500 rebate is available for each dependent child who is under 17 years old.
The rebate is reduced by 5% of the individual’s adjusted gross income in excess of (1) $150,000 for joint filers; (2) $112,500 for heads of households; and (3) $75,000 for single individuals or individuals married filing separately. The rebate is completely phased out for joint filers whose adjusted gross income equals or exceeds $198,000; $146,500 for heads of households; and $99,000 for single taxpayers or taxpayers married filing separately.
The rebate is calculated based on the taxpayer’s 2019 tax return. If a tax return has not yet been filed for 2019, the IRS will calculate the rebate based on the 2018 tax return. “Social security recipients who are not typically required to file a tax return need to take no action, and will receive their payment directly to their bank account,” said Treasury Secretary Steven T. Mnuchin.
Most eligible individuals need take no action to obtain this rebate. The IRS will send out the rebates, either by check or direct deposit as rapidly as possible.
Required Minimum Distributions (RMDs) are suspended for 2020. Many seniors were very concerned that they would have to take required minimum distributions from their retirement accounts for 2020, with the market down sharply and continuing to plummet as I write this blog. This would require them to sell stocks/investments with steep losses.
Seniors are required to take RMDs from their retirement accounts once they reach the age of 72 (it was 70 ½ before 2020). Fortunately for seniors, the CARES Act waives the RMD requirement for 2020, including inherited IRAs. Additionally the waiver covers distributions required by April 1, 2020 due to the senior having reached the age of 70 ½ in 2019.
Penalty Free Withdrawal from Retirement Plan for 2020. If an individual is younger than 59 ½, that individual is subject to a 10% early withdrawal penalty, on top of the income tax owed on the withdrawal. The CARES Act waives the 10% penalty for retirement plan distributions for individuals experiencing financial hardships, up to $100,000 in distributions.
Some people have criticized this provision, claiming that it is encouraging people to take money out of their retirement plans early, particularly when the market is so depressed. But some people may not have a choice.
An individual qualifies for the early withdrawal if (1) the individual, his or her spouse or his or her dependent has been diagnosed with the Coronavirus; (2) the individual experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the virus, being unable to work due to the lack of child care due to the virus, closing or reduced hours of a business owned or operated by the individual due to the virus or other factors as determined by the Secretary of the Treasury.
The distribution may be contributed back to the retirement plan for up to 3 years after the distribution and those contributions will not count against the annual contribution limits.
Additionally, the distributions may be included in income ratably over 3 years.
Loan limits from retirement plans have increased from $50,000 to $100,000, and the existing rule that loans may not exceed ½ of the vested balance has been removed. Additionally, new and existing loan payments may be deferred for a year.
$300 Above the Line Charitable Deduction. The CARES Act adds a deduction in the calculation of gross income, for the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual. An eligible individual is one who does not itemize.
Modification of limitations on individual cash contributions during 2020. There is a limit on charitable deductions which is generally 60% of the adjusted gross income of an individual. That is increased to 100% for 2020.
Modification of limitations on cash contributions by corporations during 2020. A corporation’s charitable deduction cannot exceed 10% of its taxable income. The CARES Act provides that qualified contributions are allowed up to 25% of the Corporation’s taxable income.
Increase of limits on contributions of food inventory. A donation of food inventory to a charitable organization that will use it for the ill, needy or infants is deductible up to 15% of net income. The CARES Act increases the deductibility to 25% of net income.
TAX-EXCLUDED EDUCATION PAYMENTS BY AN EMPLOYER TEMPORARILY INCLUDE STUDENT LOAN PAYMENTS
An employee’s gross income does not include up to $5,250 per year of employer payments made under an educational assistance program for the employee’s education.