Written by: Elissa Wurf, PhD, CPA, EA
Please see our Tax Update blog post written April 15, 2020 for the most up-to-date tax information.
The following is a review of some of the key tax provisions of the recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act. We invite you to contact any member of our Financial Planning Team if you have questions about the bill and how it affects you.
Stimulus Payments (“Recovery Rebates”)
- Stimulus payments of $1,200/Single, $2,400/Married Filing Jointly, and up to $500 per child who qualifies for the Child Tax Credit (that is, will be under 17 by year’s end) will be made to those whose last filed tax return (2018 or 2019) shows an AGI of up to $75,000/Single or $150,000/Married Filing Jointly. Above that, there is a phase-out of $5 for every $100 earned above the limit until the stimulus benefit entirely phases out for Individuals earning $99,000 or couples earning $198,000 AGI.
- Stimulus checks could come out as soon as April 9 but may take longer. If a taxpayer has a bank account on file for the direct deposit of a tax refund, the stimulus check will be deposited into that account, and those deposits should occur during April. This affects 80% of taxpayers. People living on Social Security only, who do not file a return, will receive payments next. The 20% of taxpayers who receive physical refund checks will start receiving stimulus payments on April 24. Those checks will be issued in order of AGI, with taxpayers whose AGI is under $10,000 being first. The checks will go out in one-week increments after that, increasing AGI by $10,000 per week, with the highest income taxpayers who receive checks not receiving theirs until September.
- The stimulus check will not be taxable income. If taxpayers who filed 2018 but not 2019 returns receive too large a stimulus check, they will not be required to repay the excess. If their stimulus check should have been larger, they will receive the additional income with their 2020 tax refund.
- More information about stimulus payments, or what the IRS refers to as “economic impact payments”, can be found here.
Required Minimum Distributions (RMDs) Are Suspended
- Required minimum distributions (RMDs) from IRAs and qualified retirement plans are suspended for 2020. This includes those taxpayers who turned 70½ in 2019 who did not take their first RMD in 2019, who would normally need to take two RMDs in 2020, one by April 1 and a second by December 31. This puts those taxpayers who missed out on extending their first RMD date to age 72 (the change instituted at the end of last year by the SECURE Act) on more even footing with taxpayers who are a few months younger.
- The suspension of RMDs applies to beneficiary IRAs and retirement plans as well.
- People taking money from their own IRAs who already have taken distributions during 2020 may be able to opt to return ONE distribution due to the treacherous one rollover per 365 day rule that still applies. The distributions will then be coded as a rollover and will not be taxable. Currently, the 60-day rollover rule also still applies, meaning that the RMD distributions from January are currently not returnable, but that could still change.
- However, people who have already taken distributions from beneficiary (inherited) IRAs during 2020 are not eligible to return the distributions.
Those Directly Affected by COVID-19 Can Withdraw from a Retirement Account before age 59½ Without Penalty
- Taxpayers who have been directly impacted by the virus (that is, they or their spouse or dependent is sick or they have been adversely financially affected because of layoffs or a work hours reduction or, for a business owner, a need to close the business) will be able to take up to $100,000 from their retirement accounts if needed, and will be free from the normal penalty that applies for withdrawals taken before age 59½. Taxation of the withdrawal still applies, but the withdrawal may be included in income and taxed ratably over 3 years. In addition, monies may be paid back into the plans over a three-year period without regard to the normal retirement contribution limits. The repayments will be treated as direct rollover and not included in gross income.
Charitable Contributions
- Taxpayers who take the standard deduction can now deduct up to $300 in charitable donations from their taxable income. This is referred to as an “above the line” charitable deduction. Contributions must be made directly to a public charity. Contributions made through donor-advised funds are not eligible.
- In addition, the normal limitation on charitable contributions limiting them to 60% of AGI is suspended for the year. An individual may make contributions that are deductible up to 100% of AGI. Amounts greater than that will be carried forward over the following five years.