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Individual Tax Provision Changes Under the CARES Act

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law Friday, March 27 by President Trump. While much of the new law focuses on stimulus for businesses, there are a number of provisions that benefit individual taxpayers as well.

Recovery Rebates

Probably the most publicized provision in the CARES Act provides that all US resident eligible individuals with adjusted gross income (AGI) up to $75,000 ($150,000 for married individuals filing jointly) are entitled to a refundable credit in the amount of $1,200. In addition, they are eligible for an additional $500 for each qualifying child. For example, a married couple with two children under 17 would receive a total of $3,400.

Eligible individuals cannot be nonresident alien individuals, my not be dependent on another taxpayer, and must have a social security number. A qualifying child is the taxpayer's son, daughter, stepchild, adopted child, foster child, sibling, stepsibling, or a descendant of any of them who is under 17 at the end of the tax year and who lived with, and was supported by, the taxpayer. These are basically individuals for whom you can take a dependency exemption under normal tax rules and who has not attained age 17.

The credit will be determined based on AGI reported on 2019 income tax returns, if filed, or 2018 income tax returns if 2019 has not been filed. If no returns have been filed for 2018 or 2019, the IRS may use the information provided on Form 1099-SSA, Social Security Benefit Statement to issue the rebate.

The credit is reduced by $5 for each $100 that a taxpayer's income exceeds $75,000 ($150,000 for married individuals filing jointly). The credit is completely phased out at AGI over $99,000 for a single individual and $198,000 for married taxpayers filing jointly assuming no qualifying children. For taxpayers who aren’t anticipating a large 2019 individual federal tax refund and saw a significant increase in their 2019 AGI they may consider delaying filing their 2019 tax return at this time.

The IRS will issue the rebates as soon as possible electronically to any account the payee authorized after 1/1/18 for delivery of a refund or for a federal tax payment. Within 15 days after the IRS has distributed the funds, the IRS will send a notice to the taxpayer's last known address indicating how the payment was made and the amount. They will provide a phone number to call if the payment was not received.

The rebate is technically an advance payment of a 2020 tax credit. When filing for 2020, the credit will be calculated and reduced, but not below zero, by any advance payment made. Any excess can be claimed on the 2020 return, but any shortfall will not have to be repaid.

Changes to Charitable Deduction Rules

The bill provides a new, above-the-line charitable contribution deduction for 2020 of up to $300 for individuals who do not itemize their deductions. Contributions must be made in cash to public charities. Donations to private foundations, supporting organizations, and donor-advised funds do not qualify.

For those who itemize, the bill permits the taxpayer to elect to deduct charitable contributions for 2020 up to 100 percent of AGI, versus the current 60 percent limitation. To qualify the contributions must, again, be made in cash to public charities. Donations to private foundations, supporting organizations, and donor-advised funds do not qualify. It is important to note that these qualifying charitable contributions are taken into account after factoring in all other charitable contributions subject to AGI limitations. Any excess over AGI may be carried forward but will then be subject to regular AGI limits in effect in tax years after 2020.

IRA and Retirement Plan Changes

The CARES Act includes a number of changes with regard to retirement plans. Required minimum distributions (RMDs) are suspended for 2020, including those for inherited IRAs along with traditional IRA's of those over age 70 1/2. This may be advantageous if you would like to avoid selling securities in a down market to fund distributions. However, if current circumstances have dropped you into a very low tax bracket for 2020, it might make sense to take the distribution and pay little or no tax on it. Taxpayers with flow-through business losses of any age may wish to consider doing a ROTH conversion to the extent they can do so and pay little or no tax on the amount converted. If you have already taken a distribution in 2020, you must include it in gross income and pay tax on it. However, you do have up to 60 days after the date of distribution to return the funds and not pay tax on them.

For those under 59 1/2, distributions from retirement plans generally come with a 10% penalty for early withdrawal. The CARES Act provides that the 10% penalty does not apply to any COVID-19 related distribution up to $100,000. Further, the distribution is taxed over a three-year period if the taxpayer elects such treatment. Any individual who receives a COVID-19 related distribution has the option to contribute all or any portion of the distribution back to an eligible retirement plan at any time during the three-year period beginning on the day after such distribution was received.

A distribution is considered COVID-19 related if made to an individual:

  • Who is diagnosed with COVID-19 using a CDC approved test.
  • Whose spouse or dependent is diagnosed with COVID-19.
  • Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work for lack of childcare due to COVID-19, closing or reducing hours of a business due to COVID-19 or other factors determined by the Secretary of the Treasury.

A plan administrator may rely on the certification of the individual as to the satisfaction of the conditions above.

The bill also provides that the limit on loans from qualified plans is increased from $50,000 to $100,000. To qualify the loan must be COVID-19 related.

Because the federal tax deadline has been extended to July 15, 2020, an IRA contribution, allowing a deduction to be taken on a 2019 individual income tax return, can be made until July 15th. This may be something individual taxpayers consider if trying to get under the AGI threshold for the rebate or avoid Section 199A limitations.

Exclusion for Certain Student Loan Repayments

An employee's gross income generally does not include up to $5,250 per year of employer payments made under an educational assistance program. The CARES Act adds eligible student loan repayments made before January 1, 2021 to the types of educational payments that may be excluded from gross income. The maximum exclusion remains at $5,250.

Modification to Excess Business Loss Limitation Rules

Under prior law, starting in taxable years after December 31, 2017, a taxpayer (including individuals, trusts, or estates) was limited on the amount of loss they were allowed to deduct related to trades or businesses. If the total amount of trade or business activity was a net loss, the trade or business loss that was allowed as a deduction was limited to $500,000 for joint returns or $250,000 for all other filers. Any loss not allowed as a deduction was treated as a net operating loss in the following taxable year.

Under the CARES Act, the excess business loss rules have been lifted for any taxable year beginning prior to December 31, 2020. Therefore, taxpayers who were limited in 2018 and 2019 due to the TCJA excess business loss limitation rules should evaluate the need to amend their returns to claim a possible refund. There will be complexities to consider related to the ability to deduct 100 percent of the net operating loss for regular tax purposes but only 90 percent of the net operating loss for AMT purposes.

Modification of Net Operating Losses

The Act temporarily suspends the 80 percent of taxable income limitation on the use of net operating losses for tax years beginning before January 1, 2021, and allows net operating losses to be carried back for a period of five years. To the extent that a 2018 or 2019 federal return has been filed with losses limited as previously required, taxpayers should consider whether filing an amended return to fully utilize the loss or carry back the loss would be beneficial.

As you can see, the new law makes quite a few changes and creates some possible opportunities to ease the financial burdens many of us are experiencing due to the COVID-19 pandemic. We encourage you to reach out to professionals on your Bonadio service team to discuss the best approach for you. Please continue to watch for additional alerts in the days and weeks as we work to keep you informed.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.