Fast on the heels of passing the Families First Coronavirus Response Act (a law which ensures paid sick leave and unemployment benefits for employees affected by the COVID-19 pandemic along with payroll tax credits for affected employers), Congress passed and the President signed the CARES Act – a massive economic relief package with numerous tax breaks – on March 27, 2020.
For individuals, the most important form of tax-related relief, among the many, may be the recovery rebate tax credits, which are direct payments (sometimes referred to as “stimulus checks”) the government will be making available to those with income under a certain level. You will want to speak with your tax professional about the tax ramifications. As your advisers, we can help frame what may be relevant to your circumstances in general, as either an accumulator or retiree (for further discussion with your tax professional), and how best to work with your investment accounts and portfolios.
CARES Act Tax Relief for Individuals
Direct Payments: Single individuals and joint filers can expect to receive a payment of $1,200 or $2,400, respectively, plus $500 for each qualifying child. However, the rebate is reduced (but not below zero) by 5 percent of the amount by which the taxpayer’s adjusted gross income exceeds (1) $150,000 in the case of a joint return, (2) $112,500 in the case of a head of household, and (3) $75,000 in the case of a single taxpayer or a taxpayer with a filing status of married filing separately. Rebates will be issued based on 2019 income tax returns, or 2018 returns for individuals who haven’t yet filed in 2019. The rebates are eligible for electronic disbursement to any account to which the payee authorized, on or after January 1, 2018, the delivery of a refund of taxes or of a federal tax payment, including federal retirement benefits.
Above-the-Line-Deduction for Charitable Contributions of Up to $300: Individuals, whether they itemize deductions or not, can take a deduction of up to $300 for charitable contributions made during 2020 and the limitations on the amount of charitable contributions that a taxpayer may take an itemized deduction for are loosened. In addition, the CARES Act loosens the deduction limitation on contributions of food inventory.
Repayment of Student Loan Debt Excluded from Income: The CARES Act excludes from income certain student loan debt repaid by an individual’s employer. It applies to repayments made after date of enactment and before 2021.
CARES Act Tax Relief for Retirees
Using Retirement Funds Without Penalty: The CARES Act waives the 10% early withdrawal penalty for coronavirus-related distributions from retirement plans and provides the option of re-contributing the funds for up to three years after such distributions are made. A “coronavirus-related distribution” is any distribution from an eligible retirement plan made: (1) on or after January 1, 2020, and before December 31, 2020, (2) to an individual (i) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, (ii) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (iii) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, the closure or reduction of hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
Required Minimum Distribution Rules Waived for 2020: The CARES Act waives the required minimum distribution rules for 2020 for defined contribution plans, including an eligible deferred compensation plan, and individual retirement plans.
Please contact us if you have any questions about the impact of the new law. In addition, to the extent that you may benefit from filing amended tax returns as a result of the changes above, you should contact your tax professional as soon as is practical. The sooner your returns are prepared, the sooner you may see a refund.
Adam L Schwartz, CFP®, NSSA®
Barry E. Moschel, RICP®, CLU®, ChFC®, CPA
Tom Manno, CFP®