Two consistent themes to the start of a new year seem to be a plethora of overly optimistic resolutions and an equal amount of overly pessimistic dread of doing taxes.
The Coronavirus Aid, Relief, and Economic Security Act (CARES), signed March 27, 2020, contains a number of provisions related to personal income taxes. Some of these conditions are new and some are changes to existing rules— and both can create additional fear and anxiety.
Here we will address the impacts of the CARES Act on your personal taxes so you can put some of that fear to rest.
CARES Act Tax Rebates
The bill provides for recovery rebates for U.S. residents. These are advance refunds of 2020 taxes.
Any U.S. resident with a Social Security number who is not a dependent of another taxpayer is eligible, subject to income limitations.
The rebate amounts are $1,200 for taxpayers with a single or head of household filing status and $2,400 for taxpayers with a status of married filing jointly. Taxpayers are also eligible for an additional $500 rebate for each qualifying child under age 17 at December 31, 2020.
The income cutoffs are $75,000 for taxpayers with a filing status of single, $112,500 for taxpayers with a filing status of head of household, and $150,000 for taxpayers with a filing status of married filing jointly. There is a phase-out window beginning at those levels.
The IRS used 2019 tax information to qualify taxpayers for the refunds, and 2018 tax information in cases where 2019 was not yet available. Additionally taxpayers who did not need to file those years could file an informational return to generate the rebate.
The common question is what happens if you either qualified based on a prior year’s income but don’t qualify when your 2020 return is submitted, or conversely, did not qualify before but qualify now due to a decrease in taxable income? Let’s break that lengthy thing into parts.
If you received a rebate based on your 2018 or 2019 income and do not qualify for the rebate when you submit your 2020 taxes, you have nothing to worry about. The government anticipated this would happen in limited circumstances and did not include any provision to recover these funds.
If you did not receive a rebate because your 2018 or 2019 income was too high to qualify but qualify based on your 2020 income, you will get a rebate after filing your 2020 taxes.
Your 2020 income is the key income for qualifying and if you are entitled by law to a rebate and haven’t gotten it you can get it by filing for 2020.
This is also the case for people who didn’t file 2018 or 2019 tax returns even though they needed to. They were not eligible to get a rebate via an informational return and if they failed to file in time to have gotten their rebate it will be calculated off of their 2020 return.
Waiver of Early Withdrawal Penalty
The bill provides a waiver of the 10 percent early withdrawal penalty for coronavirus related withdrawals from retirement plans. The penalty is waived on up to $100,000 of distributions made after January 1, 2020, that meet certain criteria.
Individuals who were diagnosed with coronavirus via an approved test, or whose spouse was diagnosed with coronavirus via an approved test, are eligible for the waiver.
Individuals can also qualify if they have suffered adverse financial consequences due to coronavirus and meet the criteria in the bill.
Qualifying withdrawals are not subject to the premature distribution penalty but are subject to income tax on the distribution.
The taxpayer has the option to pay the tax ratably over three years beginning with the 2020 tax year, or they can avoid the tax on the distribution by re-contributing the distributed funds within three years.
Waiver of Required Minimum Distributions
CARES waives required minimum distribution (RMD) rules for defined contribution plans for 2020. If you were subject to RMDs from a defined contribution plan for the 2020 tax year, you do not have to take the distribution.
This benefits many people who are forced to take income they don’t need to take from their retirement plans in order to meet the RMD rules.
It is important to note that this waiver is for defined contribution plans and does not apply to defined benefit plans.
Defined benefit plans typically meet RMD requirements by beginning distributions by the appropriate RMD date.
You cannot avoid RMDs by delaying beginning distributions from a defined benefit plan; there is no waiver to the RMD rules for these plans.
The CARES Act provides some favorable rules for cash contributions to qualifying charities for the 2020 tax year.
Individuals who do not itemize their deductions can take an above-the-line deduction of up to $300 for these charitable contributions.
Individuals who do itemize can deduct up to 100 percent of their adjusted gross income for these contributions.
Student Loan Repayment Exclusion
In addition to the other student loan provisions of the Act, CARES provides an exclusion from income for student loan repayments made by an employer, if the repayment meets the requirements of other educational assistance programs, such as being nondiscriminatory and not in lieu of other compensation.
This exclusion is for up to $5,250 in student loan repayments made by the employer between March 27, 2020, and December 31, 2020. This makes these payments a nontaxable benefit to the employee.
The Bottom Line on the CARES Act and Taxes
The $2.2 trillion CARES Act is the largest stimulus in U.S. history, accounting for approximately 10 percent of national GDP. This behemoth bill has provisions that affect nearly every American, and correspondingly most of their taxes.
The provisions for individuals tend to be fairly straightforward; those that apply to businesses can be more complex.
For now, there are only a handful of these changes individuals need to deal with on their 2020 returns. Hopefully next year will be brighter. Armed with this information, you can rest a little easier on your taxes and get back to work on those resolutions.