Late on March 25, 2020, the US Senate released the final tax of the CARES Act, the third Coronavirus related Bill and much needed stimulus package. The Bill passed the House and signed into law by the President on March 27th.
At this time, we want to stress to our clients that so far, all that has been done is the passage (eventual) of the law. We still need to get regulations issued to help define the key questions and details of the law along with guidance from Federal agencies on the mechanics of claiming these benefits. As more information is released, we will share with you and begin to help you navigating (along with your team and other providers, such as payroll processors) navigate these waters to get the necessary assistance for you.
2020 Recovery Rebates for Individuals
The “headline” provision for individual taxpayers relates to individual rebates, scheduled to be distributed as early as two weeks from today. These rebates are for $1,200 for a single individual and $2,400 for married couples, with an additional $500 per child under 17. There is no rebate amount for other dependents, such as children in college or elderly parents that you may claim as a dependent.
The rebate checks are advance payment of a tax credit for your 2020 tax return. The amount of the initial payment is determined as follows:
a. 2019 Federal Income Tax Return (if filed)
b. 2018 Federal Income Tax Return
c. Form 1099-SSA (if no return filed)
Only those with a valid social security number and who are not claimed as a dependent on another return.
The payments have a phase out for Adjusted Gross Income (AGI) above a certain amount – $75,000 for single, $112,500 for Head of Household and $150,000 for Married Filing Joint. For each $100 above these thresholds, your advance payment is phased out by $5. This means that for single taxpayers with no children the benefit phases out totally at $99,000 and for Married at $198,000. The maximum phaseout levels get higher as a taxpayer has more children. Again, to emphasize, this initial payment is based on your 2019 return if filed, or on your 2018 tax return if not filed. The Washington Post has developed this calculator to assist curious taxpayers.
At this time, we are unaware as to when the Treasury will query the data for this payment. Given that most returns take about a week+ to get processed, any taxpayer that has not yet filed will likely be getting the rebate based on their 2018 data. We have no official notice or confirmation of this, but if more information becomes available, we will update.
Per the Presidential press briefing on March 25th, 2020 and other press interviews, the IRS expects payments to go out within 2-3 weeks. Further, the IRS will be required to contact taxpayers at their last known address within 15 days as part of the Act and undertake a public information campaign.
As we noted in the above, this payment coming out is the initial payment of a tax credit for a taxpayers 2020 return. When filing their 2020 returns, taxpayers will have to “reconcile” this payment based on their 2020 income and dependents. Any underpayment (e.g. because of a new child born in 2020, a loss of income in 2020) will be treated as a refundable credit when filing your 2020 return.
Any advance refunds of credit (the initial payments) shall be accounted for as part of this reconciliation, as the 2020 credit “shall be reduced (but not below zero).” This is important to note, as based on the law and common interpretation, any overpayment because of using 2018 or 2019 data that would otherwise make you ineligible for 2020 will NOT be required to be repaid. To note, IRS Regulations could potentially make this interpretation incorrect, but that is not expected at this time.
Special Rules for Use of Retirement Funds
As a general rule, above all we would like to advise clients to only tap retirement funds as a last resort. However, the CARES act allows taxpayers to draw up to $100,000 for Coronavirus related purposes without incurring the 10% penalty for early distributions. Further, any income tax due will be spread over 3 years and any recontributions of this amount, within 3 years is allowed and will be treated as a rollover and not subject to tax.
A Coronavirus related distribution is
1. A diagnosis of COVID-19
2. Spouse or dependent with a diagnosis of COVID-19
3. Experience of adverse financial consequences as a result of a quarantine, furlough, lay off, hour reduction or lack of child care inhibiting work.
Employees will be required to certify to these circumstances.
Temporary Waiver of Required Minimum Distributions
The CARES Act waives the requirement for taxpayers over the required age (72 in 2020 per the SECURE Act) to take a required minimum distribution from their retirement plan.
Allowance for “Above The Line” Charitable Contribution
The Act allows for a new, up to $300, “above the line” charitable donation deduction. This is available only for taxpayers who do not itemize their deductions.
Modification of Limits on Charitable Giving
Taxpayers are generally, per the TCJA, limited to 60% of their Adjusted Gross Income, for contributions to public charities. This limit has been lifted for 2020, allowing for up to 100% of AGI to be covered by Charitable Giving. This increase is limited to organizations as described in Section 170(b)(1)(A), which means generally public charities like churches, educational organizations and other 501(c)(3) organizations. A private foundation is generally not going to be eligible unless it is a Private Operating Foundation. There is a specific exclusion for the establishment of a new or maintenance of an existing donor advised fund.
This stimulus bill brings a lot of interesting and important changes for individual taxpayers.