The Coronavirus Aid, Relief, and Economic Security Act, (CARES Act) was signed into law to mitigate the impact of the COVID-19 pandemic at the federal level. Individuals that meet specific criteria have access to the following options:

Recovery Rebate

Eligible individuals are entitled to a Recovery Rebate Credit for their first tax year beginning in 2020. However, the government will make advance payments of the credit as soon as possible, with eligibility and credit amounts based on information from 2019 or 2018. The Recovery Rebate Credit is fully refundable, but it is phased out for higher-income taxpayers.

The maximum credit is $1,200 for each eligible individual ($2,400 for two eligible individuals who file a joint return), plus $500 for each qualifying child. However, the maximum credit amount is reduced (but not below zero) by five percent of the taxpayer’s AGI that exceeds:  $150,000 for joint filers— the $2,400 credit phases out completely at $198,000;  $112,500 for a head of household—the $1,200 credit phases out completely at $136,500;  $75,000 for any other taxpayer—the $1,200 credit phases out completely at $99,000.

Eligible individuals are all individuals other than an individual who qualifies as another taxpayer’s dependent for a tax year beginning during the calendar year in which the individual’s tax year begins, a nonresident alien; or an estate or trust. Eligible individuals and qualifying children must also have valid identification numbers.

Although the Recovery Rebate Credit applies to the 2020 tax year, the government will issue advance refunds of the credit as quickly as possible, based on pre-2020 information. The Treasury Secretary may certify and disburse advance credits electronically to any account that the payee authorized on or after January 1, 2018, to receive federal tax refunds or other federal payments via direct deposit. Disbursing officials may modify this information as necessary to facilitate the accurate and efficient delivery of the advance credits.

The advance Recovery Rebate Credits are generally based on 2019 tax returns. A taxpayer who was an eligible individual for 2019 is treated as having made a tax payment for 2019 equal to the amount of his or her advance refund. The advance refund amount is the amount that would have been allowed as a credit for 2019 if the Recovery Rebate Credit had applied to the 2019 tax year.

However, if an eligible individual has not filed a 2019 return by the time the advance credits are determined, the advance credit is based on the individual’s 2018 tax return. If the individual has not filed a 2018 return by the time the advance payments are determined, the advance payment is based on information provided for calendar year 2019 in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board.

Waiver of the early distribution penalty for coronavirus-related distributions from Retirement Accounts

To allow taxpayers access to their funds, the 10-percent additional tax on early distributions is waived for any qualified coronavirus-related distributions from a retirement plan. Eligible individuals who take such distributions can include them in gross income over a three-year span and have three years to repay the amount.

The aggregate amount of distributions received by an individual which may be treated as coronavirus-related distributions for any tax year shall not exceed $100,000. To qualify as a coronavirus-related distribution, the distribution must be from an eligible retirement plan made on or after the March 27, 2020 and before December 31, 2020. Additionally, individuals must:

• Have been made to an individual who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (Covid-19) by a test approved by the Centers for Disease Control and Prevention
• Have a spouse or dependent diagnosed with such virus or disease by such a test
• Experience adverse financial consequences as a result the coronavirus

Adverse financial consequences can include consequences from being quarantined; being furloughed or 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.

Eligible retirement plans include individual retirement accounts or annuities (IRAs), qualified employer-sponsored retirement plans, 403(a) annuity plans, 403(b) tax-sheltered annuity plans, and 457(b) plans. The threshold limit on loans from an employer-sponsored retirement plan for a qualified individual affected by the coronavirus also is increased to the lesser of $100,000 or 100 percent of the present value (but not less than $10,000) of the plan participant’s benefits under the plan.

In addition, if a qualified individual has a loan repayment due date after the date of enactment of the CARES Act and before December 31, 2020, on an outstanding loan, the payment due date is delayed one year (or, if later, until the date which is 180 days after the date of the enactment of the CARES Act), and the later payments are adjusted.

Waiver of 2020 required minimum distributions from Retirement Accounts

For the 2020 calendar year, the required minimum distribution (RMD) requirements generally applicable to retirement plans are suspended with respect to defined contribution retirement plans, including IRAs. As a result, plan participants and beneficiaries will not be required by law to take RMDs for the year. If the participant dies before minimum distributions have begun, and the entire remaining interest must be distributed within five years of the participant’s death, then 2020 will be excluded from the five-year period.

Changes to charitable contributions for 2020

For tax years beginning after 2019, an eligible individual may claim an above-the-line deduction in computing adjusted gross income of up to $300 for any qualified charitable contribution. The percentage limitation on the charitable deduction contribution base for individuals is suspended for 2020.

There are other provisions available that benefit individuals, but the above are the ones we view as having the most impact on our client base.

If you have any questions about your specific situation, do not hesitate to reach out directly to your accountant.