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CARES Act for Individuals: Rebates, Retirement Account Changes, And More

March 31, 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act which was signed by President Trump on Friday contains several individual benefits.  We will highlight some of the more popular ones.

Individual Stimulus Payments

The recovery rebates for individuals are a highly publicized and highly anticipated provision of the CARES Act.  Below we explain the finer details of who will get these rebates, how to determine the amount of your rebate, when you will receive these rebates and how the rebates will be delivered to you.

Who is eligible? 

  • All individuals except nonresident alien individuals, anyone who can be claimed as a dependent, and estates or trusts
  • You must have a social security number to receive this benefit

How much will I receive?

  • $1,200 ($2,400 for eligible individuals filing a joint return)
  • $500 per qualifying child, which is generally a child under age 17
  • If your adjusted gross income (AGI) exceeds certain thresholds, the credit is reduced by 5% of your income exceeding the threshold. The thresholds are:
    • $150,000 for those whose filing status is married filing jointly
    • $112,500 for those whose filing status is head of household
    • $75,000 for all others
  • The IRS will send a letter to you to let you know how the payment was made (direct deposit or check), the amount of the payment, and a phone number for an IRS representative to call if you don’t receive your payment. The letter will be mailed within approximately 2 weeks of the date the payment is made.
Example: For a married couple who files with a married filing jointly status, has two qualifying children, and AGI of $175,000, the credit would be calculated as follows:
    • Maximum credit of $3,400 ($2,400 for individuals with married filing jointly status plus $500 for each qualifying child)
    • Less $1,250 (5% of $25,000, which is the income that exceeds $150,000)
    • Total rebate: $2,150

How is my AGI determined?

For the rebate payments, your AGI will be based upon your 2019 tax return.  If you have not yet filed your 2019 tax return, your AGI will be based upon your 2018 tax return.  For those who were not required to file a 2018 or 2019 tax return, AGI will be determined based upon your 2019 Social Security Benefit statement.

But wait, that’s not all…

Although you may not qualify for an immediate payment based upon the criteria above, you may qualify for a credit against your 2020 income tax liability.  Additionally, you could receive additional rebate credits against your 2020 income tax liability if you were not previously eligible for the full amount of the recovery rebate check because you exceeded the AGI threshold.

On your 2020 income tax return, you’ll calculate the credits based upon the number of qualifying individuals, qualifying children, and AGI.  Those credits must be reduced by any recovery rebate previously received.  Since many small business owners have been negatively impacted by shelter in place orders, many expect that 2020 AGI will be significantly lower than 2019 AGI so there is an opportunity to recover the difference between the maximum credit and the advance payment when you file your 2020 tax return.

If you have been one of those impacted positively by the crisis and are expecting your AGI to increase in 2020 (perhaps you are in the business of selling toilet paper!), there is currently nothing that would require you to repay a rebate check you received that was based upon 2018 or 2019 AGI.

When will I receive my rebate check and how will it be delivered?

The bill states that refunds shall be made “as rapidly as possible.”  The Treasury department has announced plans to start issuing the checks within the next three weeks.

The IRS will use direct deposit if you have supplied your bank account information on your previously-filed income tax returns.  If the IRS does not have your bank account information, it will mail a check to the address on your individual income tax return. 

Retirement Account Changes 

Money taken out of a qualified retirement plan by someone under age 59 ½ will not be subject to the 10% early withdrawal penalty if the distribution does not exceed $100,000.  The distribution must be made during 2020 to an individual:

  • Who is, or has a spouse or dependent who is, diagnosed with SRS-COV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC), or
  • Experiences adverse financial consequences as a result of:
    • being quarantined, furloughed, laid off, or having work hours reduced due to such virus or disease,
    • being unable to work due to lack of childcare,
    • closing or reducing hours of a business you own due to such virus or disease, or
    • other factors as determined by the Secretary of the Treasury.

Administrators of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the adverse financial consequences requirements in determining whether any distribution is a coronavirus-related distribution.

Any individual who receives a coronavirus-related distribution may,  at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to the retirement plan to repay the distribution and avoid any income recognition. 

Distributions which are not repaid will escape the early withdrawal penalty but are still subject to income tax.  Any amount required to be included in gross income for such year may, however, be spread over a 3-year period beginning with such taxable year.

The CARES Act also waives the requirement to take required minimum distributions from a retirement plan for 2020.

Charitable Contributions

Cash contributions to public charities are deductible up to 100% (increased from 60%) of AGI for 2020.  Any excess is carried forward for up to 5 years.  For those individuals who claim the standard deduction rather than itemized deductions, you are now able to claim up to $300 of your contributions to certain qualifying charities in addition to the standard deduction amount.

For corporations, the limit has been increased from 10% of adjusted taxable income to 25%.

Exclusion from Income of Employer Payment of Employee Student Loan Debt

An employer can pay up to $5,250 in 2020 of an employee’s student loan obligation on a tax-free basis.  The interest on the student loan is not deductible by the employee to the extent the loan is paid tax-free by the employer.  Please note however, employers can only pay up to $5,250 combined in 2020 for both an employee’s qualified educational expenses under Section 127 and any payoff of the same employee’s student loan.

Expanded Unemployment Benefits

During the past week, states have seen a surge in unemployment claims.  In addition to providing federal funds to assist the states in meeting the unemployment needs, the CARES Act also expands the amount of benefits available, the length of benefit period, and the eligibility criteria for those claiming unemployment benefits, some of which are:

  • Pandemic Unemployment Assistance - the CARES Act expands unemployment benefits to “covered” individuals by aiding those individuals who would otherwise not be entitled to any other unemployment compensation.  The benefits are available to covered individuals while unemployed, partially unemployed or unable to work because of a variety of COVID-19-related reasons, including having to stay at home to care for a child in the household who is unable to attend school or daycare as a direct result of the COVID-19 public health emergency.  Self-employed individuals, part-time workers, and those with limited work histories impacted by COVID-19 are also eligible for this benefit.  The assistance lasts up to 39 weeks.  These benefits end December 31, 2020.
  • The benefit amount is the weekly benefit amount under the unemployment compensation laws of the State where the covered individual was employed plus $600.  If there is an increase in the weekly benefit amount after the date of the enactment of the CARES Act, the amount of the Pandemic Unemployment Assistance is increased by the same amount.
  • Emergency Increase in Unemployment Compensation – adds an additional $600 to every weekly unemployment benefit, effective until July 31, 2020. 
  • Pandemic Emergency Unemployment Compensation – adds an additional 13 weeks of federally-funded unemployment compensation to individuals who have exhausted their regular State unemployment insurance.  Benefits available immediately through December 31, 2020.

If you have questions related to the CARES Act, please reach out to your MarksNelson professional. We are here to help.

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