Although the coronavirus pandemic is disrupting the financial world and our daily lives, there is some good news. The government just passed the CARES Act, which provides financial relief for businesses, nonprofit organizations and individuals. At Hantzmon Wiebel, our team of dedicated professionals is developing a series of articles to break down how the Act impacts you and/or your organization. This article focuses on how the Act impacts the individual taxpayer.
There are five areas in the CARES Act that may benefit individuals specifically:
- A recovery tax credit (advance rebate) is provided to most individuals
- Required minimum distributions (RMDs) are waived for 2020
- Charitable giving deduction is increased
- Student loan repayments by employers will not be counted in gross income on 2020 taxes
- The additional tax on premature retirement plan distributions is waived for those directly impacted by the coronavirus
The federal government will be putting money into the pockets of qualifying individuals in the near future. Under the CARES Act, eligible individuals will receive income tax rebates for 2020 equal to $1,200 for single filers, $2,400 for married filers and $500 for each eligible child. The child must be under age 17 at the end of 2020.
Those earning over the threshold amounts in the bill ($150,000 for a joint return, $112,500 for a head of household and $75,000 for all other taxpayers) will see their credits reduced. The reduction rate is $5 for every $100 of adjusted gross income (AGI) over the designated threshold. Under these rules, the credit is completely phased out for a single filer with AGI exceeding $99,000 and for joint filers with no children and AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500. The credit will be reconciled on your 2020 tax return but in no event will you ever have to repay it.
The IRS will use AGI from 2019 tax returns to determine eligibility for the rebates. If an individual hasn’t yet filed a 2019 income tax return, the IRS will determine the amount of the rebate using information from the taxpayer’s 2018 return. If no 2018 return has been filed, the IRS will use information from the individual’s 2019 Form SSA-1099, Social Security Benefit Statement or Form RRB-1099, Social Security Equivalent Benefit Statement.
This credit even benefits individuals who have no income, as well as those whose income comes entirely from non-taxable, means-tested benefit programs such as SSI benefits. However, estates, trusts, nonresident aliens and individuals for whom a dependency deduction is allowable to another taxpayer for the tax year are not eligible for this credit.
No action is required on your part to get this rebate. If you used electronic banking on a prior tax return, the funds will go directly into your account. If not, a paper check will be mailed to you. The rebate is not treated as taxable income.
Required Minimum Distributions Waived for 2020
Another benefit of the CARES Act allows individuals to leave their invested funds in their retirement plan portfolios. Normally, retirement plan or IRA owners must take required minimum distributions (RMDs) annually once they reach age 72. The CARES Act waives this requirement for the 2020 calendar year.
Charitable Giving Deductions
In the past, only those itemizing their deductions were able to receive a tax benefit for charitable donations. The CARES Act, however, allows for a $300 “above-the-line” deduction for cash donations to 501(c)(3) organizations for those claiming the standard deduction. Those who itemize also benefit as the Act removes the limit on the amount one can claim for charitable donations made within the tax year. These changes are only in effect for the 2020 tax year.
Student Loan Repayments
There is good news for those paying on student loans. Thanks to the CARES Act, payments made by your employer either to you or to the lender on any qualifying student loan before January 1, 2021, will not be included in the employee’s gross income. The annual limit of $5,250 is still in effect and the interest on student loan repayments for which the exclusion is allowable can’t be deducted.
Retirement Funds Accessible to Cover Coronavirus Costs Without Penalty
Generally, those who withdraw funds from retirement plans or IRAs prior to the age of 59½ pay an additional tax of 10% of the distribution. But these unique times require unique exceptions. Because there are many who will be unable to work for a variety of reasons related to COVID- 19, the CARES Act provides that the additional tax does not apply to any distribution made to offset the financial impacts of the coronavirus pandemic, up to $100,000. There are specific requirements for this exception to apply, so contact us before you withdraw funds from your IRA or retirement account if you are under age 59½.
Although the penalty is waived, the distributions are still taxable income. However, if the taxpayer makes one or more contributions (totaling the amount distributed) to an eligible retirement plan within 3 years of the date the distribution was received, they will avoid any income tax liability. Another option allows the amount from the distribution that is required to be included in taxable income to be included ratably over 3 taxable years.
Although there are many changes occurring rapidly at this time, you can count on us to walk you through the financial implications and provide the excellent service you have come to rely on.