Individual tax provisions of the CARES Act


On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act). The CARES Act contains a few individual tax provisions, which are briefly discussed and highlighted as follows.  

Individual recovery rebate/credit

Refundable Credit. Under the CARES Act, an eligible individual is allowed a refundable credit equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return) plus (2) $500 for each qualifying child of the taxpayer.

Individuals who have no income, as well as those whose income comes entirely from non-taxable means, are eligible for the credit.

Children who are (or can be) claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.

Phaseout of credit. The amount of the credit is reduced by 5% of the taxpayer’s adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers.

Under these rules, the credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500.

Advance rebate of credit during 2020. Even though the credit is technically for 2020, the law treats it as an overpayment for 2019 that the IRS will rebate as soon as possible during 2020.

If an individual hasn’t yet filed a 2019 income tax return, the IRS will determine the amount of the rebate using information from the taxpayer’s 2018 return. If no 2018 return has been filed, the IRS will use information from the individual’s 2019 Form SSA-1099 (Social Security Benefit Statement) or Form RRB-1099 (Social Security Equivalent Benefit Statement).

Most eligible individuals won’t have to take any action to receive an advance rebate from the IRS.
Advance rebate reduces credit allowed for 2020. The amount of credit that is allowable for 2020 must be reduced (but not below zero) by the aggregate advance rebates made or allowed to the taxpayer during 2020.

No 10% additional tax for Coronavirus-related retirement plan distributions

Individuals could withdraw as much as $100,000 from their retirement accounts in 2020 without being subject to a 10% penalty. Funds would be treated as a tax-exempt rollover contribution if repaid in the next three years. If funds weren’t repaid, they would be taxed as income over three years.

Individuals would be eligible to make withdrawals if they, their spouse, or their dependents are diagnosed with COVID-19, or if the pandemic hurts their finances, such as through layoffs or reduced hours.

Eligible individuals could receive loans for the lesser of $100,000 or the present value of their vested benefits in their employer retirement accounts in the 180 days after the bill’s enactment.

RMD requirement waived for 2020

In general, a retirement plan or IRA owner is to take required minimum distributions (RMDs) annually once the owner reaches age 72.

The provision provides that the RMD requirements generally do not apply for calendar year 2020. The RMD requirements also do not apply to any distribution which is required to be made in the calendar year.

Increased charitable deductions

The provision creates a $300 above-the-line individual charitable contribution allowance for individuals who don’t itemize their returns for tax years beginning in 2020. Limitations on individual cash charitable contributions during 2020 are also modified.

Tax-excluded education payments by an employer temporarily include student loan repayments

The provision provides that employer student loan repayment assistance paid after the bill’s enactment and before January 1, 2021, would be excluded from employees’ income tax. Repaid amounts would count toward a $5,250 limit on other forms of employer-provided education assistance, such as tuition and related expenses, that can be excluded from income.

Your Melton & Melton Team