The CARES Act Individual Tax Provisions

By Brian Glavotsky

Recovery Rebate for Individuals

Eligible taxpayers will be receiving a refundable tax credit of as much as $1,200 per individual or $2,400 for couples who file joint tax returns. An additional $500 will be provided for each qualifying child.

  • The credit will be reduced by 5% for the amount a taxpayer’s AGI exceeds $150,000 for joint returns, $112,500 for heads of household, and $75,000 for single filers. The rebate will completely phase out for taxpayer’s with AGIs exceeding $198,000, $146,500 and $99,000 respectively.
  • The rebate will be based on the 2019 tax year, if a tax return has not yet been filed, it will be based on the 2018 tax year.
  • Payments will be made through Dec. 31, 2020 and could start in as little as three weeks. They could be delivered electronically to accounts where a taxpayer had authorized deposit of a tax refund or other federal payment on or after Jan. 1, 2018.

Keep in mind that this is a 2020 tax credit being paid in advance. If the taxpayer received an advance rebate during 2020 that was less than the credit to which the taxpayer is entitled for 2020, the taxpayer will be able to claim the balance of the credit when filing the 2020 return. If, on the other hand, the advance rebate received was greater than the credit to which the taxpayer was entitled, the taxpayer will NOT have to pay back the excess.

Practical Guidance: If a taxpayer would qualify for a higher credit amount using their 2018 tax return, hold off on filing the 2019 tax return. If, on the other hand, the 2019 tax return would result in a higher credit, file the return sooner rather than later.

Charitable Contributions

The CARES Act includes two provisions regarding charitable contributions, one for those who itemize and one for those who do not.

  1. An above-the-line charitable contribution deduction of $300 will be available for individuals who do not itemize on their returns for tax years beginning in 2020.
  2. For the tax year 2020, the CARES Act provides that qualified contributions are disregarded in applying the 60% limit on CASH contributions of individuals.
  • Qualified contributions do NOT include donations made to a Code Sec. 509(a)(3) supporting organization (certain private foundations) or a donor-advised fund.
  • This provision must be elected with respect to the contribution.
  • Any carryovers of such contribution will be subject to the 60% limitation rules in the following 5 year period.

Prior year charitable contribution carryovers, carried into the tax year 2020, will be subject to the limitations in effect when those contributions were made. Only contributions made in 2020 will qualify under the CARES Act.

Effective Date: These amendments apply to tax years beginning after December 31, 2019.

Retirement Distributions

Prior to the enactment of the CARES Act, a distribution from a qualified retirement plan was subject to a 10% additional tax unless the distribution met an exception. The new law provides that the additional tax will not apply to any coronavirus-related distribution, up to $100,000. The former applies to any distribution made on or after January 1, 2020 and before December 31, 2020 from an eligible retirement plan to a qualified individual.

A qualified individual is an individual who;

  1. Is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the CDC,
  2. Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
  3. Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

The distribution can be contributed back to the retirement plan. The funds would be treated as a tax-exempt rollover contribution if repaid within the next three years.

If the funds were not repaid, and unless the taxpayer elects not to, the distribution will be included in income over a three year period beginning with the tax year in which the distribution occurred.

Additionally, eligible individuals could receive loans for the lesser of $100,000 or the present value of their vested benefits in their employer retirement accounts in the 180 days after the bills enactment.

Effective Date: These amendments apply to distributions made on or after January 1, 2020, and before December 31, 2020.

RMD requirement waived for 2020 

The CARES Act provides that the RMD requirements do not apply for calendar year 2020 to the following plans:

  1. A defined contribution plan described in Code Sec. 403(a) or Code Sec. 403(b);
  2. A defined contribution plan which is an eligible deferred compensation plan described in Code Sec. 457(b) but only if such plan is maintained by an employer described in Code Sec. 457(e)(1)(A) below;
  3. State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and/or
  4. an individual retirement plan.

Without the change, retirees’ required minimum distributions would be based on their account balances at the end of 2019, when the amounts were generally much higher than they are now. A similar one-year waiver was offered after the 2008 financial crisis.

If you or your clients have any questions please reach out.

Brian Glavotsky

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