CARES Act: Individual Taxpayer Highlights

April 10, 2020

There are many pages in the CARES Act written about individual taxpayer provisions. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law by President Trump on March 27, 2020. CARES Act provides relief to individuals, businesses, nonprofits and others affected by COVID-19. JPS has summarized some of the top provisions for individual taxpayers to consider.

2020 Recovery Refund Checks for Individuals
The CARES Act provides eligible individuals with a refund check, which JPS has addressed in a previous article. Several additional details include:

• Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.
• A qualifying child is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, under age 17, who has not provided more than half of their own support, who has lived with the taxpayer for more than half of the year, and who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse.

Individuals between the ages of 17 and 24 are ineligible to be claimed as a qualifying child and may be unable to claim their own independent rebate if they are eligible dependents on their parents’ tax return.

Charitable Contributions Above-the-line deductions
Under the CARES Act, taxpayers who do not itemize deductions may now deduct up to $300 in qualified charitable deductions in 2020. A qualified charitable contribution is a charitable contribution made in cash, for which a charitable deduction is otherwise allowed, and that is made to certain publicly supported charities.

This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor-advised fund.

Modification of Limitations on Charitable Contributions During 2020
Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their adjusted gross income. Any contributions in excess of the 60% limitation may be carried forward as a charitable contribution in each of the succeeding five years.

The CARES Act suspends this limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the taxpayer’s adjusted gross income.

Any excess is still carried forward as a charitable contribution in each of the succeeding five years.

Compensation, Benefits, and Payroll Relief
The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. JPS addressed these provisions in two previous articles CARES Act: Unemployment Compensation Benefits and Payroll And Self-Employment Tax Relief In The Wake Of COVID-19.

Two long-awaited provisions allow employers to assist employees with college loan debt through tax-free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.

Temporary Waiver of RMD Rules for Certain Retirement Plans & Accounts
Generally, required minimum distributions must begin at age 72 for individuals born on or after July 1, 1949, or at age 70 ½ for individuals born before July 1, 1949.

The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for the calendar year 2020.

This applies even for taxpayers who turned 70 ½ in 2019 but deferred their first RMD to April 1, 2020. This provision aims to avoid lost earning power on taxes due on distributions and maximizes potential gain as the market recovers.

RMDs that have already been taken in 2020 may be rolled over within 60 days of the distribution.

Waived RMDs do not need to be taken in subsequent years. However, any forgone RMD in 2020 will affect the account balance used to calculate the RMD in 2021 and future years.

It is not known whether additional relief will be offered for individuals who took their RMD early in 2020 and are already outside the 60-day rollover window.

On a historical note, RMDs were last waived in 2009. At that time, the IRS issued a notice stating that the 60-day rollover deadline would be satisfied if completed by a given date that year. It is possible that similar guidance will be issued this year.

Special Rules for Use of Retirement Funds
Eligible individuals can withdraw up to $100,000 as a coronavirus-related distribution from tax-qualified retirement plans during 2020 without incurring the usual 10% early distribution penalty.

A coronavirus-related distribution is one made to an individual, their spouse or dependent (defined more broadly than a qualifying child) who is diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention. It also includes those who experience adverse financial consequences from the virus as a result of being quarantined, being furloughed or laid off or having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual, or other factors as determined by the Treasury Secretary.

Taxable distributions should generally be included in gross income ratably over a three-year period.

Taxpayers may re-contribute the withdrawn amounts in one or more re-contribution payments to the qualified plan at any time within three years of the distribution. These repayments will be treated as a tax-free rollover and not subject to that year’s cap on contributions.

What’s unclear in the CARES Act is the timing of these two three-year periods and whether they run concurrently, or whether the three-year gross income inclusion period is subsequent to the three-year payback period.

The CARES Act also makes it easier to borrow money from 401(k) plans, raising the borrowing limit from $50,000 to $100,000 until September 23, 2020, and by delaying the payment dates for any loans due the rest of 2020 for one year.

Business owners may wish to read this article previously written by JPS.  

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