Individual Tax Provisions in the CARES Act

Individual Tax Provisions - Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

Individual recovery rebate/credit (Code Sec. 6428(c), as added by Act Sec. 2201(a))

All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate.  In addition, they are eligible for an additional $500 per child.  This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.  

For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as IRS will use a taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return.  This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit.  The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. 

For a more in-depth look at this topic, see our article here.

No 10% additional tax for coronavirus-related retirement plan distributions (Act Sec. 2202(a)(1))

Consistent with previous disaster-related relief, this provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020.  In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.  Further, this provision provides flexibility for loans from certain retirement plans for coronavirus-related relief. 

A coronavirus-related distribution is one made to an individual:  (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

RMD requirement waived for 2020 (Code Sec. 401(a)(9)(I)(i), as amended by Act Sec. 2203(a))

This provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.

$300 above-the-line charitable deduction (Code Sec. 62(a)(22), as amended by Act Sec. 2204(a))

The CARES Act allows an individual to make a cash contribution of up to $300 to certain qualifying charities and deduct the contribution “above-the-line” in computing adjusted gross income. Thus, the taxpayer receives the deduction in addition to the standard deduction. This above-the-line deduction is here for 2020 and beyond, but is available only to a taxpayer who does not itemize their deductions.

Modification of limitations on individual cash charitable contributions during 2020 (Act Sec. 2205(a)(1))

The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations.  For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020.  For corporations, the 10-percent limitation is increased to 25 percent of taxable income.  This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent.

Exclusion for certain employer payments of student loans (Act Sec. 2206)

The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis.  Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.  The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law.  The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.

These new rules can be complicated and at times hard to understand.  We encourage you to seek out advice before making a decision.  The GMP staff are up to date on the new rules and are available to help guide you through the complicated details that could benefit you and your business.  Click here to set up a time to talk with a member of the GMP staff.