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CARES Act – Rebates and Other Individual Provisions

Wesley Irvine

March 31, 2020

Recovery Rebates for Individuals

One of the most talked about provisions in the CARES Act involves the advance recovery rebates for individuals. Eligible individuals will receive a one-time payment advance of their 2020 credit refund.

Tax credit is equal to the sum of $1,200 for single filers ($2,400 for those filing a joint return) plus an amount equal to the product of $500 multiplied by the number of qualifying children (generally a taxpayer’s dependent child that is aged 16 or younger). However, the tax credit is limited based on the taxpayer’s Adjusted Gross Income. The credit shall be reduced (but not below zero) by 5 percent of so much of the taxpayer’s adjusted gross income that exceeds:

  1. $150,000 in the case of a joint return
  2. $112,500 in the case of a head of household return
  3. $75,000 in the case of a taxpayer not described in paragraph (1) or (2)*

*Therefore, a single filer with no children will be completely phased out of the credit with an AGI level of $99,000 and a joint filer will be completely phased out with an AGI level of $198,000.

The credit amount will be calculated based on information reported on a taxpayer’s 2018 return (unless a 2019 return has already been filed).  However, if a taxpayer hasn’t filed a 2018 or 2019 return, the IRS may use a taxpayer’s social security statement to calculate the credit.  

In order to qualify for the credit, taxpayers must provide a Social Security number (SSN) for themselves, their spouse (if married filing jointly), and any child for whom they claim the $500 child credit.  Adoption taxpayer ID numbers (ATINs) are also acceptable.

An “eligible individual” means any individual other than:

  1. Any non-resident alien individual
  2. Any individual that is claimed as a dependent on another taxpayer’s tax return
  3. An estate or trust

While the initial credit calculation is based on a taxpayer’s 2018/2019 tax return information, the refund amount will be finalized on the taxpayer’s 2020 return.

  1. If the recovery credit amount calculated on the 2020 return is greater than the advance payment, the taxpayer will get the additional amount (net of any other taxes owed) when their 2020 return is filed.
  2. If the recovery credit is less than the advance payment, the taxpayer will not have to repay the IRS for the difference.

Advance credit payments are not considered taxable income.

Retirement Plan Provisions

The bill waives the 10-percent penalty on early withdrawals from qualified retirement plans for coronavirus-related distributions.

  1. On or after January 1, 2020, and before December 31, 2020
  2. To an individual:
    1. Who is diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention, or,
    2. Whose spouse or dependent is diagnosed with such virus or disease by such a test, or,
    3. Who experiences adverse financial consequences as a result of being quarantined, being furloughed, 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, closing or reducing 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
  3. The aggregate amount of distributions that may be treated as coronavirus-related distributions shall not exceed $100,000.  Distributions in excess of the $100,000 threshold could be subject to the early withdrawal penalty.

Any income attributable to an early withdrawal is subject to tax over a three-year period, and taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual limits on contributions if made within three years.

The maximum loan a taxpayer can take from a qualified retirement plan is increasing from 50,000 to $100,000. This applies to loans made to individuals within the 180-day period beginning on the date of the enactment of the CARES Act, March 27, 2020.  Additionally, if the due date for any loan occurs  between the date of enactment of the CARES Act and December 31, 2020, the due date will be pushed back for one year.

The bill waives the required minimum distribution rules for certain retirement plans and accounts.  This provision only applies for calendar year 2020.

Charitable Contributions

The bill includes a provision that allows an individual an above-the-line deduction for charitable contributions of up to $300 for the tax year beginning in 2020.

For taxpayers that itemize deductions, the AGI limitations related to allowable charitable contributions are suspended.  Previously, charitable contributions were limited to 60% of AGI.

In the case of corporations, the taxable income limitation on charitable contributions is increased from 10% to 25%.  To the extent a corporation exceeds this limit, it will carry over the excess contributions for 5 years.

Exclusion for Certain Employer Payments of Student Loans

This bill provides an exclusion from income for employer-paid student loan repayment assistance payments. Traditionally these payments are taxable to the employee in the year the payments were made. The bill expanded the definition of educational assistance to now include payments of principal and/or interest for up to $5,250 in employer-paid educational assistance. The employer can make these payments to the employee or directly to the lender.  This provision is only applicable for payments made between March 28, 2020 and December 31, 2020.

To review other provisions from the CARES Act, click here.

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