Individual Income Tax of the CARES ACT

Introduction 

The Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, was signed on March 27, 2020.  The CARES Act includes several provisions related to individual income tax. This article discusses a few of those individual tax provisions of the CARES Act:  

  1. Economic impact payments 
  2. Relief for retirement accounts 
  3. Charitable contributions 
  4. Exclusion for certain employer payments for student loans 
  5. Loss limitation for non-corporate taxpayers 

Individual income tax provisions of the CARES Act

1. Economic Impact Payments 

Every individual except non-resident aliens, dependents, and trusts should receive economic impact payments. Exceptions exist for those with earnings over specified income limits.  The payment amounts are as follows: 

  • $1,200 for a single taxpayer; $2,400 for married couples filing a joint return. 
  • $500 for each qualified child (under age 17) 

Example: A“typical” family of 4 with two children under the age of 17 should expect to receive $3,400. 

Payment limits – Payments are by reduced 5% of the amount of adjusted gross income that exceeds: 

  • $75,000 for a single individual 
  • $112,500 for a Head-of Household filer; or 
  • $150,000 for a married couple filing a joint return. 

For a single filer with no children, the phase-out range is from $75,000 to $99,000. 

Those filing as Head-of-Household filer with one qualifying child are subject to a phase-out range from $112,500 to $146,500. 

To illustrate – for a family with 2 parents and 2 qualifying children, the phase-out range is from $150,000 to $218,000. Note that if both children are over the age of 16, the payment drops to $2,400.  In this example, the phase-out range becomes $150,000 to $198,000. 

By now, certain individuals should have already received their economic impact payment.  This includes anyone qualified to receive a payment and who filed a tax return for either 2018 or 2019 that resulted in a refund by direct deposit.  

For those who should have received an economic impact payment but did not, there are two useful tools on the IRS homepage:  

  • The “Non-Filers: Enter Payment Info Here” section of IRS.GOV is for those who have not filed a tax return for either 2018 or 2019. The non-filer enters their bank account info allowing them to receive the payment by direct deposit. 
  • The “Get My Payment” section of IRS.GOV is for anyone who filed an income tax return for either 2018 or 2019 without direct deposit information or with incorrect direct deposit information. 

Note that anyone without direct deposit information should receive their payment by mailed check. 

The tax characterization of the payments has its uncertainties. These payments are generally viewed as pre-payments of 2020 income tax.   As a result, individuals should expect a reconciliation on their 2020 federal income tax return.  This reconciliation will match what the taxpayer received with what should have been received.   

2. Relief for Retirement Accounts under the CARES Act 

– Elimination of the Required Minimum Distribution (RMD) for 2020  

Normally anyone with a retirement account (other than a ROTH account) who is over the age of 70 ½ (age 72 after 2019) must receive a required minimum distribution. For first time recipients, the initial RMD may be delayed until April 1 of the year following the year in which they reached the threshold age. However, due to the COVID-19 market disruption, the CARES Act waived any RMD payments due in 2020. 

– Retirement Plan Distributions 

Congress provided a tax benefit related to retirement plan distributions as part of the CARES Act. This benefit provides a method to access retirement plans without early distribution penalties on qualifying retirement plan distributions. In addition, the normal 60-day rollover rules were revised.  

For example, a person who meets certain criteria may take up to $100,000 in retirement plan distributions in 2020 without having to pay an early distribution penalty. As a result, income from such a distribution is recognized over 3 years or the amount may be repaid (rolled over) over a 3-year period. 

The criteria include the following: 

  • The person was diagnosed with COVID-19, 
  • The person’s spouse is diagnosed with COVID-19, or 
  • The person experiences adverse financial consequences as a result of;
    • quarantine, 
    • furlough, lay-off or forced reduced work hours, 
    • inability to work because of lack of childcare,  
    • closing or reducing hours of a business owned or operated by that person, 
    • or other factors determined by the IRS. 

– Retirement Plan Loans 

Retirement plan loan limits, like 401(k) loan limits, doubled for loans made within 180 days of the enactment of the CARES Act. As a result, the maximum loan becomes the lesser of $100,000, or 100% of the account balance. 

3. Charitable Contributions Under the CARES Act 

The CARES Act included a charitable giving incentive of a new $300 maximum charitable deduction for 2020.  This new deduction does not require the taxpayer to itemize deductions on their personal return. Normally, the charitable contribution as an itemized deduction has a limitation that varies from 20% to 60% of adjusted gross income depending on the type of contribution. However, charitable contributions used as an itemized deduction for 2020 have no limitation.  

4. Exclusion of certain employer payments of student loans 

Under the CARES Act, certain payments are excluded from the employee’s income.  This exclusion includes employer payments on any qualified education loan incurred by the employee for employee education, whether paid to the employee or a lender.   This portion of the CARES ACT applies to employer payments for either principal or interest. An employer can only exclude payments from an employee’s income for payments made after March 27, 2020, and before January 1, 2021. 

5. Limitation on Annual Losses and NOLs for Non-Corporate Taxpayers 

Prior law in place for 2018 through 2025 limited the ability to claim business losses to no more than $500,000 for the year. Excess amounts could be carried forward as a net operating loss (NOL). The CARES Act shifts the applicable dates for the annual loss limitation to 2021 through 2025 and allows a 5-year carryback of losses arising in 2018 through 2020. For 2021 through 2025, the CARES Act continues to exempt farming losses from the annual limitation and the prohibition on NOL carrybacks. 

Summary 

The CARES Act has provisions to help individuals financially by providing cash payments. For those with retirement plans, the CARES Act affords protection from retirement fund withdrawals in a down market, protection from early distribution penalties, and the ability to borrow more from the plan. Similarly, provisions are also included related to charitable giving, exemption from income of certain employer student loan payments, and the ability to claim more business losses. The items of COVID-19 tax relief for individuals are often complicated. In conclusion, this tax relief can require competent professional assistance with various requirements. Contact us if you have any questions.  

Meet the Author

Michael specializes in meeting the tax compliance, projection, and planning needs of businesses, entrepreneurs, and business owners. He is Tax Partner in PW Associates, a firm that provides CFO and outsourced tax and accounting services. Michael has regional and small CPA firm experience and ran a sole practitioner tax practice for over 25 years.


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Disclaimer  
This communication is provided by PW Associates, PLLC for educational and informational purposes only and is not intended, nor should it be construed as tax or legal advice.  The comments in this communication are based on our understanding of applicable rules and regulations as of May 31, 2020. 

Any commentary interpreted as tax advice in this communication (including attachments and/or links) is not intended to be used, and cannot be used, for the purpose of avoiding penalties imposed on the taxpayer by any governmental taxing authority or agency. In addition, if any such commentary or advice is made available to any person or party other than the party to whom the advice was originally directed, then such commentary or advice, under IRS Circular 230, is to be considered as being delivered to support the promotion or marketing (by a person other than PW Associates, PLLC) of the transaction or matter discussed or referenced. Thus, each taxpayer should seek specific tax advice based on the taxpayer’s particular circumstances from an independent tax advisor. 

Useful links in this post 

Congress – CARES Act

Economic impact payments – IRS

Get my payment – IRS

Non-filers payment – IRS

Coronavirus tax relief – IRS

Cares Act changes minimum distribution rules for 2020 – Forbes

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