ON TAXES: CARES Act is not short on individual income tax relief

Recovery Rebate Payments

Under the CARES Act, individual taxpayers will receive stimulus payments of $1,200 ($2,400 for married taxpayers filing jointly), plus $500 per qualifying child. These “recovery rebates” are designed as refundable tax credits so the payments will not be taxable income to the recipients. The payments, which are estimated to reach $507 billion in aggregate, are reduced for individuals with adjusted gross incomes (AGIs) of $75,000 or more ($112,500 for a head of household; $150,000 for married filing jointly).

Charitable Contribution Deductions

In a previous Insight, we explored how increased standard deduction amounts under the Tax Cuts and Jobs Act (TCJA) of 2017 (for 2019, $12,400 for individuals; $24,800 for married filing jointly) have resulted in tax planning to maximize the year-to-year tax benefits associated with itemized deductions, including charitable contributions, mortgage interest and state and local taxes. To this end, the CARES Act enhances a taxpayer’s ability to benefit from charitable contribution deductions post-TCJA. First, the CARES Act creates a permanent “above-the-line” charitable contribution deduction up to $300 of cash contributions to certain 501(c)(3) public charities (excluding private foundations, supporting organizations and donor advised funds). As an “above-the-line” deduction (i.e. reduction to arrive at a taxpayer’s AGI), this benefit is available even if the taxpayer elects to take the standard deduction. Second, the CARES Act temporarily suspends the 50% AGI limitation for charitable contributions so that taxpayers can receive a charitable contribution deduction for up to 100% of their 2020 AGI (again, excluding contributions to private foundations, supporting organizations and donor advised funds).

Distributions and Loans from Retirement Accounts

Generally, if a taxpayer takes an early distribution (before age 59 ½) from a retirement account (i.e., individual retirement account (IRA) or 401k retirement plan), the taxpayer must pay income tax on the withdrawal plus a 10% penalty. The CARES Act creates an exemption from the 10% penalty on early distributions from qualified retirement accounts during 2020 up to $100,000 if the taxpayer is diagnosed with COVID-19, his or her spouse or dependent is diagnosed with COVID-19, or he or she experiences adverse financial hardship due to COVID-19. Under the CARES Act, the income attributable to a COVID-19 distribution will be taxable over 3 years (unless the taxpayer elects otherwise). Alternatively, the taxpayer may recontribute the distributed amount into his or her retirement account within the three-year period without regard to the cap on retirement contributions, and the amount recontributed will not be treated as taxable income to the taxpayer. In addition, the CARES Act also increases the maximum amount that an individual affected by COVID-19 may borrow from a qualified plan from $50,000 to $100,000.

Tax-Free Employer Repayment of Employee Student Loans

The CARES Act permits employer’s to make tax-free payments of up to $5,250 on employees’ student loan debt if made after the enactment of the CARES Act and before January 1, 2021. Qualifying payments include student loans as well as other educational assistance, including tuition, fees and books.

Other Tax-Related Relief

In addition to the incentives under the CARES Act, the Treasury and Internal Revenue Service have extended the due dates for the first estimated tax payments and the April 15 filing date for 2019 tax returns to July 15, 2020. Extensions were also granted for deadlines for like-kind exchanges and qualified opportunity zone investments occurring on or after April 1, 2020, and before July 15, 2020. The IRS also announced that a variety of collection activities, including liens and levies will be suspended through July 15, 2020.

As can be seen, the CARES Act establishes a number of meaningful changes to current tax laws aimed at making it easier for individuals to access cash and reduce tax liability. Additional legislation increasing the amounts available under the CARES Act Paycheck Protection Program has already passed and there is continued discussion of additional relief packages, including additional tax-based stimulus and incentives.