April 9, 2020
Key Components of the CARES Act
The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a $2 trillion emergency relief package to provide financial help to those impacted by the COVID-19 pandemic. The passage of this Act creates a variety of implications for individuals and businesses. Below is a summary of the key components related to individuals and families.
Direct Payments to Taxpayers
Within the next three weeks, the U.S. government plans to send direct payments to qualifying individuals.
- Married couples who file jointly could receive a “Recovery Rebate Payment” of up to $2,400, (Yes, even those collecting Social Security benefits)
- All other filers could receive a payment of up to $1,200.
- The payment amount for both groups can increase by up to $500 per child under the age of 17.
- Adults (anyone 17 or older) claimed as a dependent on another’s tax return will not receive a Recovery Rebate.
To be eligible for the full payment amount, the taxpayer’s Adjusted Gross Income (AGI) must be under the following thresholds:
- Married filing jointly: $150,000
- Head of Household: $112,500
- All others: $75,000
The IRS will first look at filed 2019 tax returns to determine eligibility. If the 2019 tax return is not yet filed, they will use the 2018 tax return. If taxpayers are eligible based on 2020 income, but not based on prior year income, a refundable credit will be available when filing 2020 income tax returns.
Payment amounts will start phasing out for income levels above the thresholds. Joint filers without children with an AGI over $198,000 will not receive a payment (and single filers with an AGI above $99,000 will not receive a payment).
If there is an account electronically linked to the IRS, payments will be directly deposited into taxpayer’s bank account or otherwise send a check to the last known address.
2020 Required Minimum Distributions
2020 Required Minimum Distributions (RMDs) from IRAs and other retirement accounts have been suspended for 2020. This eliminates the need for both retirement account owners and beneficiaries taking distributions from inherited accounts to fulfill RMD requirements for 2020.
If 2020 RMDs have already been taken by individuals, the distribution amount can be returned anytime in the next three years and avoid taxation on the distribution if the individual has been impacted by COVID-19. Notably, beneficiaries of an inherited account cannot return previously received RMDs to the account.
Those who use some IRA distributions to make contributions to a charity as a qualified charitable distribution (QCD) can continue to do this. The amount of the QCD will be excluded from your income as in past years.
Up to $100,000 can be distributed from IRAs and employer sponsored retirement plans by individuals impacted by Coronavirus. The distributions are exempt from the normal 10% penalty that would generally apply for distributions before age 59.5. The distribution can be repaid over three years and the taxable income can also be spread over three years if desired.
Qualified Charitable Contribution Deduction
Starting in the 2020 tax year, taxpayers can take a charitable deduction up to $300 for contributions to qualifying charities. This deduction will be an “above-the-line” (deducted from gross income to reach AGI) and will provide a tax benefit (albeit relatively small) to those who don’t itemize deductions. To be eligible for the deduction, the donations must be made in cash and can’t be used to fund a Donor Advised Fund or 509(a)(3) supporting organizations.
The Act allows states to raise their unemployment benefits by up to $600/week for 4 weeks. Additionally, eligibility of coverage will be expanded to include self-employed individuals, as well as others who aren’t typically eligible for regular unemployment benefits. Finally, the Act extends unemployment compensation by 13 weeks and waives the typical one week waiting period for benefits to start. In Minnesota, new unemployment claims can be submitted online and there is a schedule set-up on what day of the week individuals can apply based on their social security numbers.
Federal student loan payments are automatically deferred until September 30, 2020 and loan interest will not accrue during the deferment period.
The above summary does not include all of the provisions on the extensive CARES Act and specifically excludes provisions related to businesses. Business related provisions will be summarized separately.