Redpath Insights

Individual Tax Provisions of the CARES Act

by Meagan Weber, CPA, MBT

UPDATED - July 1, 2020 - Earlier this year, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the IRS granted relief to individuals who were required to take an RMD (required minimum distribution) from their retirement plan in 2020 by waiving the requirement to do so. However, when the initial relief was announced in late March, many taxpayers had already taken their RMDs for the 2020 tax year and some were left unable to take advantage of the waiverโ€”specifically, those who took distributions in January and those who were taking beneficiary distributions or multiple periodic distributions.

In Notice 2020-51, the IRS provides much-welcomed relief to retirees and beneficiaries of inherited IRAs.  The IRS now says that any RMDs taken in 2020 can now be repaid by August 31, 2020 with the repayment treated as a tax-free rollover (limited to the amount of the waived RMD). In addition, the repayment/rollover is not subject to the general rule limiting one rollover per 12-month period. The waiver applies to all types of accounts subject to the RMD rules including 401(k)s, IRAs, 403(b) plans, and SEP IRAs and to individuals with an April 1, 2020 RBD (required beginning date) due to reaching age 70 ยฝ in 2019.

This relief also applies to distributions made to beneficiaries of inherited IRAs (which were not included in the original relief measures) and provides that the five-year rule for liquidating an inherited IRA is applied without regard to tax year 2020.

It is important to note that Notice 2020-51 does not affect an individualโ€™s RBD (the date on which they must begin receiving required minimum distributions) which is generally April 1 of the year following the year the individual reaches age 72 (previously 70 ยฝ, adjusted by the SECURE Act) and does not apply to defined benefit plans.

The guidance provided in Notice 2020-51 levels the playing field for many retirement plan participants subject to the RMD rules in 2020. If you can afford to forgo your RMD for 2020, putting the funds back into your retirement plan could allow your money to grow as the stock market recovers, and leave you with lower taxable income for 2020 which may translate to various tax benefits such as less tax paid on social security payments or deductible medical expenses.

ORIGINAL POST - April 2, 2020 - The recently passed CARES Act, which you can see a broad overview of by clicking here, provides emergency assistance to individuals and businesses impacted by the coronavirus pandemic.

Provisions of the CARES Act that affect individual taxpayers include recovery rebates, an adjustment to the availability of retirement funds, a change to charitable contribution deductions, and an allowance for employer contributions to employee student loan debt.

2020 recovery rebate for individuals

The biggest individual tax provision to come out of the CARES Act is the individual โ€œrecovery rebate.โ€ The government will begin cutting rebate checks to individual taxpayers immediately, with eligibility for a recovery rebate determined by first looking at your 2019 tax return. If you have not yet filed your 2019 return, they will instead look at your 2018 return. Social Security and railroad retiree recipients not otherwise required to file a return are eligible and are not required to file a return. Other taxpayers who typically do not file returns but who are eligible for the rebate will need to submit a simple tax return to receive the rebate.

To be eligible, the tax return must also provide a valid social security number for yourself, your spouse, and your qualifying children. Those claimed as a dependent on another tax return, non-resident aliens, and trusts and estates are not eligible.

A single taxpayer is eligible for a recovery rebate of up to $1,200 (which increases to $2,400 if married filing jointly). An additional $500 will be paid for each qualifying child under age 17.  The rebate phases out once adjusted gross income (AGI) exceeds $75,000 for single filers, $112,500 for head of household, or $150,000 for married filing joint. The rebate is reduced by 5% of the amount AGI exceeds the above thresholds. Here are a few examples:

  • Single taxpayer with no child โ€“ eligible for a $1,200 recovery rebate - will be phased out completely once AGI exceeds $99,000
  • Single taxpayer with one child โ€“ eligible for a $1,700 recovery rebate โ€“ will be phased out completely once AGI exceeds $109,000
  • Married taxpayers with one child โ€“ eligible for a $2,900 recovery rebate โ€“ will be phased out completely once AGI exceeds $208,000
  • Married taxpayers with two children โ€“ eligible for a $3,400 recovery rebate โ€“ will be phased out completely once AGI exceeds $218,000

There is no phase-in, so all recipients will receive the same recovery rebate as long as they are under the phaseout threshold.

The recovery rebates will be paid between now and December 31, 2020. They will be paid in accordance with elections made on your 2019 tax return (or 2018 if 2019 not filed yet). If the IRS has your direct deposit information on file, payments will be paid electronically to the bank account on file. If not, a paper check will be mailed. Within 15 days of the payment distribution, notice will be sent by mail to all taxpayers to the last known address on file with the IRS. The notice will indicate the method by which the payment was made, the amount, and include an IRS contact phone number in case the payment is not received.

The Treasury is developing a web-based portal for individuals to provide their banking information to the IRS so rebates can be received via direct deposit rather than by checkโ€”look for this to become available in the coming weeks.

Payments received are treated as an advance refund payment of the taxpayerโ€™s 2020 taxes.  When preparing your 2020 tax return, the recovery rebate amount will be recomputed based on your actual tax return filed for 2020. This amount will be compared to the advance payment you received in 2020, and if the advance payment you received was less than what you are owed in 2020, the difference will reduce your 2020 tax liability.  On the other hand, if the advance payment is greater than what you are owed based on your 2020 tax return, you are not required to recognize the excess as income. Taxpayers will not be required to repay any excess payment.

Using retirement funds for coronavirus costs

Distributions taken from a qualified retirement plan before the age of 59 ยฝ are subject to income tax, as well as a 10% early withdrawal penalty (with some exceptions), and the CARES act adds a new exception to the penalty; a taxpayer is allowed to take a โ€œcoronavirus-related distributionโ€ of up to $100,000 in 2020 without penalty.  A โ€œcoronavirus-related distributionโ€ is a distribution to an individual:

  • who is diagnosed with COVID-19 or SARS-COV-2 by a CDC approved test,
  • whose spouse or dependent is diagnosed with COVID-19 or SARS-COV-2 by a CDC approved test,
  • who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off, relegated to reduced work hours, or unable to work due to not having childcare in place.

The distribution is still subject to income tax, but the penalty is waived. However, the Act allows the taxpayer to spread the income over a 3-year period beginning with the 2020 tax year. The taxpayer can elect not to have the 3-year spread apply, and to avoid recognizing income, the taxpayer has the option to repay the distribution to the retirement plan within 3 years of when the distribution was made.

The amount an individual may borrow from their retirement plan has been increased from $50,000 to $100,000. The loan must be made between March 27, 2020, and September 23, 2020.

Waiver of required minimum distributions

Those taxpayers who must take a required minimum distribution (RMD) from their retirement plan are waived from this requirement for the 2020 tax year only. If someone has taken an RMD for 2020 or takes distributions periodically throughout the year, there is no provision to return money and forego the distribution retroactively.

This means thatโ€”while the changes are effective from January 1, 2020โ€”there is no reference to an ability to repay any distributions to the plan after they have been paid out.

There may, however, be a way to address this issue if a taxpayer has already taken their required minimum distribution for 2020. The distribution would be eligible for a rollover into an IRA or other eligible retirement plan within 60 days of the distribution.

However, this option is not available for beneficiaries who have taken an RMD from an inherited IRA. Also, note that taxpayers cannot utilize the 60-day rollover window more than once in a 12-month period.

Charitable contributions

For the tax year 2020 and beyond, an above-the-line deduction (before AGI) of up to $300 is allowed for cash contributions to certain qualified charities. This deduction is in addition to the standard deduction and is only available for taxpayers who do not itemize their deductions. 

For taxpayers who do itemize, the law temporarily allows for charitable contributions to be deducted up to 100% of their adjusted gross income (AGI)โ€”prior to the Act, cash contributions made to public charities were limited to 60% of the taxpayerโ€™s AGI.

Contributions to new or existing donor-advised funds do not qualify for either the above-the-line deduction or the 100% of AGI limitation.

Student loan assistance from employers

Generally, if someone pays a debt on your behalf you have taxable income. Under the Act, in 2020 there is an exclusion from income of employer payment of employee student loan debt; an employer can pay up to $5,250 of an employeeโ€™s student loan tax-free. To the extent an employeeโ€™s loan is paid tax-free, the employee cannot deduct the interest paid on the student loan. This provision modifies an existing rule which allows an employer to pay up to $5,250 of an employeeโ€™s qualified educational expenses, tax-free to the employeeโ€”but this is now a combined limit. The employer can pay towards both an employeeโ€™s student loan and education expenses, but the maximum combined amount tax-free to the employee is $5,250.

Additional resources and information

As the nation responds to the coronavirus crisis, we want to ensure that you have access to the information you may require to help you make informed decisions. A collection of Covid-19 resources and information is available by clicking here.

COVID-19 CARES Act

Meagan Weber, CPA, MBT

Meagan Weber, CPA, MBT

Meagan Weber is a senior manager and leads the personal tax service area. She has been with the firm since 2014 and specializes in high net worth individual tax compliance and planning, gift and trust compliance and planning, and wealth transfer planning. She has provided public accounting services since 2008 and has been at Redpath and Company since 2014.