CARES Act – Individual Benefits

Posted April 2020

On March 27th, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law to provide relief for businesses, employers, and individuals affected by the COVID-19 pandemic and economic downturn. This article will cover a list of topics about the tax-related provisions of the CARES Act for individuals.

  • Recovery rebates for individuals
  • Waiver of 10% early distribution penalty
  • Waiver of required minimum distribution (RMD) rules
  • Retirement Plan Loans
  • Charitable deduction liberalizations
  • Exclusion for employer payments of student loans

Recovery Rebates for Individuals
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 joints returns. An additional $500 payment will be sent to taxpayers for each qualifying child dependent under age 17.

Rebates are gradually phased out if adjusted gross income is over $75,000 for singles or marrieds filing separately, $122,500 for heads of household, and $150,000 for joint filers. All recipients under these phase-out thresholds will receive the full rebate amount.  Rebates are fully phased out if income exceeds $99,000 for singles or marrieds filing separately, $114,500 for heads of household with one child, and $198,000 for joint filers with no children.

IRS will compute the rebate based on a taxpayer’s tax year 2019 return if filed, or tax year 2018 if no 2019 return has yet been filed. If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.

IRS may make the rebate electronically to any account to which the payee authorized a refund or payment of federal taxes after December 31, 2017.  Otherwise, the rebates will be paid out in the form of checks. No later than 15 days after distributing a rebate payment, IRS must mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.

If a taxpayer receives an advance rebate during 2020 that is less than the available credit based on 2020 income, the taxpayer will be able to claim the balance of the credit when filing the 2020 return. If, on the other hand, the advance rebate received was greater than the credit to which the taxpayer is entitled, the taxpayer will not have to pay back the excess because the 2020 credit cannot be reduced below zero.

Waiver of 10% Early Distribution Penalty
The additional 10% tax on early distributions from IRAs and defined retirement plans is waived for distributions made between January 1 and December 31, 2020 by a person who is, or whose family is, infected with COVID-19 or who is economically harmed by COVID-19. Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA at any time during the 3-year period beginning on the day after the date on which such distribution was received.

Income arising from the distributions is spread out over 3 years, unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions.

Waiver of Required Minimum Distribution (RMD) Rules
Required minimum distributions that otherwise would have to be made in 2020 from retirement 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.

Retirement Plan Loans
For retirement plans that allow participant loans, the CARES Act doubles the amount available for a loan by increasing the limit to the lesser of $100,000 or 100% of the qualified individual participant’s vested account balance. Qualified individuals with an outstanding loan in the plan with a repayment from March 27, 2020 through December 31, 2020 can delay the repayment for one year and disregard the 5-year maximum repayment limit if applicable.

Retirement plans will need to be amended to add or amend hardship distribution rules.  However, plans are allowed to operate in accordance with these provisions prior to the amendment, even if hardship distribution or loans are not currently allowed. Plan documents must be formally amended by the end of the plan year beginning in 2022.

Charitable Deduction Liberalizations
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.

The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) does not apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.

Exclusion for Employer Payments of Student Loans
An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.