On Friday, March 27th President Trump signed the Coronavirus Aid, Relief and Economic Stimulus Act (CARES Act) which provides financial support to both individuals and businesses. There are a number of provisions included within the CARES Act and we have summarized the sections we believe are most applicable to our clients. Our News page includes additional posts regarding CARES Act changes to Unemployment Insurance, Business Tax Provisions and Stimulus Loans Available.
To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joint returns. An additional $500 payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).
Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint).
The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed).
Waiver of 10% Early Distribution Penalty
The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person or family member who is infected with the Coronavirus or who is economically harmed by the Coronavirus. Penalty-free distributions are limited to $100,000, and may be re-contributed to the plan or IRA by the taxpayer to avoid a taxable distribution. Taxable income from the distributions is spread out over three years unless the person elects to recognize the income in the first year.
Waiver of Required Distribution Rules
Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.
The CARES Act makes four significant changes to the rules regarding charitable deductions:
(1) Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
(2) The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income doesn’t apply to cash contributions made to public charities in 2020. Instead, an individual’s qualifying contributions, can be as much as 100% of modified adjusted gross income. No connection between the contributions and COVID-19 activities is required.
(3) Similarly, the limitation on charitable deductions for corporations that is generally 10% of modified taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of modified taxable income. No connection between the contributions and COVID-19 activities is required.
(4) For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
We will continue to keep you updated with new developments as they become available. We remain fully committed to serving and supporting our clients during these challenging times.
*This article reflects tax law as of March 27, 2020. Some material may be affected by subsequent changes in the laws or in the interpretation of such laws.