On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the ''CARES Act"). This is the 3rd piece of legislation aimed at the coronavirus (COVID-19) pandemic and is sometimes referred to as "Phase 3." ("Phase 1" was the $8.3 billion spending bill enacted March 6. "Phase 2" was the Families First Coronavirus Response Act enacted March 18.) The CARES Act is a massive stimulus bill which includes lending facilities to large and small businesses (including targeted distressed businesses), expanded unemployment benefits and individual and business tax changes. The projected cost of the bill is over $2 trillion, of which about $500 billion is allocated to tax changes.
In this Alert we summarize selected individual tax provisions. For Businesses, we refer you to this link from the Senate. It summarizes the business provisions including:
- The Paycheck Protection Program
- Small Business Debt Relief Program
- Economic Injury Disaster Loans and Grants
- Small Business Counseling
- Small Business Contracting
- Small Business Tax Provisions
Individual Stimulus Payment: Who and How Much?
The CARES Act includes stimulus payments of $1,200 for each individual and $500 for each dependent child, defined by the child tax credit rules as under age 17.
Individuals with adjusted gross income (AGI) up to $75,000 a year are eligible for the full $1,200 payment. The payment is reduced by $5 for every $100 in income above $75,000. The payment amount is entirely phased out at an AGI of $99,000.
Married filing joint couples with AGIs up to $150,000 a year are eligible for a $2,400 payment. The payment is reduced by $5 for every $100 in income above $150,000. The payment amount is entirely phased out at an AGI of $198,000 (if the taxpayers have no dependent children). Married couples also will receive an additional $500 for every dependent child under 17.
Example - MFJ with no children. Keith and Norma are married filing joint. They have no dependent children. If they have AGI of $150,000 or less, they are eligible for a $2,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out at an AGI of $198,000.
Example - MFJ with two children. Chris and Pat are married filing joint. They have two dependent children under age 17. If they have AGI of $150,000 or less, they are eligible for a $3,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out if their income hits the top of the threshold amount.
Head of household filers with AGIs up $112,500 a year are eligible for the full $1,200 payment and an additional payment of $500 for each dependent child under age 17. The payment is reduced by $5 for every $100 in income above $112,500. Head of household taxpayers will also receive an additional $500 per dependent child under age 17. With no eligible children, a head of household filer is phased out at AGI of $137,000. With one eligible dependent child, a head of household filer is entirely phased out of the rebate payment at AGI of $146,400.
Example. Head of Household- no children under 17. Heather has an 18-year-old high school senior living with her and qualifies as a head of household filer. If her AGI is $100,000, Heather's payment is $1,200. Her dependent child does not qualify her for the additional $500 payment because the child is not under age 17. If Heather's dependent child is under age 17, her payment is $1,700.
Phaseout of the rebate. If your income is above the threshold amounts, a reduced payment will result. The reduced amount using your own income (AGI) can easily be calculated using the Washington Post calculator.
What needs to be done to get the Stimulus Rebate?
Nothing. The IRS will deposit the calculated amount directly into your bank account, using the AGI and the bank information on your 2019 tax return. If your 2019 return hasn't been filed, the IRS will use the AGI and the bank information from your 2018 tax return. If there's no bank information on the return, the IRS will mail a check.
When Will the Payments Arrive?
The IRS says that a direct deposit should be in your bank account in about three weeks. Checks should start arriving in six to eight weeks.
2020 Tax Return
Technically the stimulus rebate is a 2020 refundable tax credit. The payment received in the next few weeks is an IRS advance. If you have less income in 2020 than in 2019 because of layoffs, reduced hours and closed businesses, and your rebate payment was reduced by the income threshold, you'll receive a credit for the difference on your 2020 return. If for some reason, you receive too much of an advanced payment, you do not have to pay back the excess.
Other provisions affecting individuals:
- 1 Tax favored withdrawals from retirement plans- withdrawals up to $100,000 from retirement plans during 2020 are not subject to the 10% penalty for those under 59 ½. The monies can be repaid over 3 years. The amounts not repaid within 3 years can be included in taxable income ratably over 3 years.
- 2 Loans from Retirement plans: Currently the limit for loans is $50,000. Under the Act, loans up to $100,000 is allowed during the 180-day period beginning March 27.
- 3 Waiver of Required Minimum Distributions: - You do not have to take RMDs for 2020. For beneficiaries who inherit a plan that requires the 5 year rule for distributions, the deadline can be ignored for 2020 which effectively makes it a 6 year rule.
- 4 Charitable contributions: Up to $300 of charitable donations can be deducted by those who do not itemize. Contributions must be made in cash and cannot be made to a donor advised fund and certain supporting organizations.
- 5 Student Loan Relief – all federal student loan payments are suspended for 6 months through Sept 20, 2020.
Contact us if you have questions and stay safe.