Guest Contributor: Tim Savage, CPA - Weaver
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which enacts key tax provisions to aid individuals and increase liquidity for small businesses in response to the COVID-19 pandemic.
For individuals, the tax changes include direct cash payments, penalty-free withdrawals from retirement savings accounts, increased deductions for charitable contributions, and modifications to changes previously enacted by the 2017 Tax Cuts & Jobs Act.
Direct Cash Payments
The IRS is sending direct cash payment to eligible individuals as a tax credit against their 2020 income tax liability. The one-time payment amount is equal to the sum of:
$1,200 for individuals filing as single or head of household
$2,400 for individuals filing as married
$500 for each qualifying child of the taxpayer
The payment phases out if the taxpayer’s 2019 (if filed) or 2018 tax return adjusted gross income (AGI) exceeds a certain threshold. Phase out begins if AGI exceeds:
$75,000 for individuals filing as single
$112,500 for individuals filing as head of household
$150,000 for individuals filing as married
As a result, the payment is completely eliminated for:
AGI exceeding $99,000 for individuals filing as single
AGI exceeding $136,500 for individuals filing as head of household
AGI exceeding $198,000 for individuals filing as married
A taxpayer’s AGI is based on the amount reported on his or her 2019 tax return or, if a 2019 tax return has not yet been filed, the amount reported on the taxpayer’s 2018 tax return.
An “eligible individual” is any individual other than a nonresident alien or an individual for whom a dependency deduction is allowable to another taxpayer for the tax year. However, an eligible individual must have a valid Social Security number to receive a payment. Likewise, if a qualifying child is taken into account in determining the amount of an individual’s payment, the qualifying child must also have a valid Social Security number.
Waiver of 10% Early Withdrawal Penalty
The Act waives the 10% early withdrawal penalty on “coronavirus-related distributions” from eligible retirement plans of up to $100,000. A coronavirus-related distribution is a distribution made to an individual during calendar year 2020 who:
Is diagnosed with COVID-19
Has a spouse or dependent who is diagnosed with COVID-19
Experiences adverse financial consequences from being unable to work due to COVID-19
An individual that receives a coronavirus-related distribution can elect to pay any resulting income tax on that distribution ratably over three years. In addition, if the withdrawn amount is recontributed to the retirement plan within three years, it will be treated as a tax-free rollover.
The Act also increases the limits for loans from retirement plans for qualified relief from $50,000 to $100,000.
Required Minimum Distributions Not Required for 2020
The Act provides that the minimum distribution rules requiring a retirement plan participant or IRA owner reaching age 72 to take required minimum distributions annually do not apply for calendar year 2020.
Increased Deductions for Charitable Contributions
The Act allows individuals who do not itemize deductions to deduct up to $300 in cash charitable contributions made in 2020. However, the deduction is not available for contributions to a donor-advised fund or a supporting organization.
In addition, the Act eliminates the percentage of AGI limitations that normally apply to the income tax deduction for charitable contributions in the case of “qualified contributions.” A qualified contribution is a cash contribution:
That is made in calendar year 2020 to a public charity or private foundation (but not to a donor-advised fund or supporting organization); and
For which the taxpayer elects to treat as a qualified contribution.
Because of the percentage of AGI limitations being eliminated for qualified contributions, a taxpayer could eliminate his or her 2020 income tax liability by making a sufficient amount of qualified contributions.
Employer Payments of Student Loans
The Act adds student loan payments to the list of eligible educational assistance programs under IRC Section 127(c). As a result, an employer’s payment of an employee’s student loan in an amount up to $5,250 may be excluded from the employee’s gross income provided the employer makes the payment after March 27, 2020, and before January 1, 2021.
Suspension of Excess Business Loss Rule
The Act also suspends the $250,000 excess business loss limitation under Section 461(l) through December 31, 2020. This means that affected taxpayers may be able to fully deduct excess business losses arising in 2018, 2019 and 2020.
Tim Savage, CPA, provides federal and state tax planning, compliance, and advisory services for individuals and businesses of all sizes. He has more than seven years of public accounting
experience, including three years at a Big Four firm where he served multi-billion dollar public companies, banks and private equity firms. Tim routinely advises on the most technical issues surrounding taxation and financial reporting. He currently works at Weaver and can be reached at tim.savage@weaver.com or by phone at 972.448.9244.
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