On Friday March 27, 2020 President Trump signed the CARES Act in to law. This $2.2 trillion Act has numerous provisions that effect individuals and business, particularly through the tax system. We have detailed some of the more important pieces here for you.
2020 Recovery Rebates for Individuals
The CARES Act provides payments to taxpayers (subject to income limits) by way of a tax credit. The payments that will be sent out are an advance of this tax credit and therefore we expect that there will be some form of reconciling this credit on your 2020 Individual Income Tax Return. This has happened with past rebate checks in 2001 and 2008. Taxpayers should keep track of how much they receive and be prepared to have this information ready when preparing their 2020 Income Tax Returns.
Most taxpayers should receive a rebate of $1,200 ($2,400 for Married Filing Joint) and $500 for each qualifying child. The payment will be reduced by 5% of the taxpayer's adjusted gross income (AGI) over $75,000 for Single, Married Filing Separate, or Qualifying WIndow(er); $112,500 for Head of Household; and $150,000 for Married Filing Joint. Therefore, if your AGI is more than $99,000 for Single, Married Filing Separate, or Qualifying Window(er); $136,500 for Head of Household; and $194,000 for Married Filing Joint you will NOT receive a rebate check.
The rebate will be based upon the AGI shown on a taxpayer's 2019 tax return. If your 2019 return has not been filed, the amount will be based upon the taxpayer's 2018 AGI. If neither a 2018 or 2019 return has been filed, a rebate will be processed based upon any Social Security benefits a taxpayer receives.
Taxpayers who are Nonresident Aliens, who does not have a Social Security number, who is a dependent of another taxpayer, or an estate or trust are NOT eligible for the payment. Furthermore, these rebates are not subject to offset meaning if you owe Federal taxes or would otherwise not receive a refund due to offset, you will receive a payment.
The rebates will be direct deposited into the account shown on the 2018 or 2019 tax return (whichever return is used to base the rebate off of) or sent by check to the taxpayer's last know address. Within 15 days after the rebate payment is sent, the IRS is to send a letter in the mail to every taxpayer notifying them of the amount of the rebate, how it was paid to them, and a number to call if there are issues.
Penalty-free Retirement Distributions
Certain taxpayers are permitted to withdraw up to $100,000 from a retirement plan or IRA for "coronavirus related distributions" without incurring the 10% premature distribution penalty. A coronavirus-related distribution inclludes a distribution:
- Made after Jan. 1, 2020 and before Dec. 31, 2020.
- To an individual who is diagnosed with the SARS-CoV-2 or COVID-19 virus by a test approved by the Centers for Disease Control.
- To a spouse or dependent of a person diagnosed with such virus by such test.
- To persons who experience adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, being unable to work due to lack of child care, closing or reducing business hours of a business owned or operated by the individual, or other factors as determined by the Secretary of the Treasury.
If the taxpayer chooses, they may, at any time during the 3-year period beginning on the day after the date of such distribution from a retirement plan, make one or more contributions in an aggregate amount not to exceed the amount of the distribution to an eligible retirement plan and treat the contribution as a rollover contribution. This would allow a taxpayer to essential replace the funds taken within 3 years to avoid having the distribution treated as income.
Coronavirus-related distributions are included in the taxpayer's income, beginning with the year of distribution, ratably over a three-year period unless the taxpayer elects not to do so. This would be particularly helpful if a taxpayer plans to replace any of the money distributed over the 3 year period mentioned above.
Temporary Waiver of Required Minimum Distributions (RMDs)
RMDs required to be made or that begin in 2020 are waived. Calendar year 2020 is disregarded for distributions that are being made under the 5-year rule.
Partial Above-the-Line Charitable Contribution Deduction
A charitable contribution not to exceed $300 made in taxable years beginning in 2020 is allowed to taxpayers who do not itemize. The contribution must be made in cash to a qualified charitable organization or a new or existing donor advised fund.
Employee Retention Credit
Employers are provided a refundable payroll tax credit for 50% of wages paid to employees during the COVID-19 crisis. The credit is available to employers whose:
- Operations were fully or partially suspended due to a COVID-19 related shutdown order, or
- Gross receipts declined by more than 50% when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.
The credit is provided for the first $10,000 of compensation, incluing health benefits, paid to an eligible employee. The credit provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Please continue to check back regularly to our website for updates as more details of this massive legislation become available. Thank you to our partners at the National Association of Tax Professionals for providing some of the above content.