On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, a sweeping economic stimulus package designed to provide financial relief for American individuals and families. Here is a brief overview of the key opportunities you can expect to see in the coming year.
Rebates for Individuals
Arguably the most talked-about portion of the stimulus plan is a refundable tax credit for individual taxpayers. To help families during this time of economic uncertainty, the government will send payments up to $1,200 to eligible taxpayers ($2,400 for married couples filing jointly) and an additional $500 for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).
Rebates will gradually phase out at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or married filing separately), $112,500 (head of household), and $150,000 (joint). The IRS will determine the rebate based on the taxpayer’s 2019 tax return (or tax year 2018, if no 2019 return has yet been filed). Taxpayers who expect their 2019 adjusted gross income to be lower than their 2018 adjusted gross income should file their 2019 return as soon as possible to receive their rebate.
Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.
Extended Tax Deadlines
2019 Income Tax Filing and Payment Extended to July 15, 2020
2019 income tax filing and payment deadlines for all taxpayers who file and pay their Federal income taxes on April 15, 2020, are automatically extended until July 15, 2020.
Estimated Tax Payments Extended to July 15, 2020
Estimated tax payments for the tax year 2020 (usually due on April 15, 2020) have been automatically extended until July 15, 2020.
Penalties and Interest Extended
Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020. You will automatically avoid interest and penalties on taxes paid before July 15, 2020.
Waiver of 10% Early Distribution Penalty
For individuals or families economically harmed by or infected with the Coronavirus, the CARES Act waives the 10% early withdrawal penalty on early distributions (made between January 1 and December 31, 2020) up to $100,000 from qualified retirement plans. Income arising from the distributions will be spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.
Waiver of Required Distribution Rules
The CARES Act will aid retirees with retirement accounts by waiving the required minimum distributions that would have had to be made in 2020. This includes distributions that would have been required by April 1, 2020, for account owners who turned 70½ in 2019.
Currently, an employee may exclude $5,250 of income for benefits from an employer-sponsored educational assistance program. The CARES Act expands this to include employer payments of student loan debt made before January 1, 2021.
Delay of Payment on Self-Employment Payroll Taxes
For the period ending December 31, 2020, the CARES Act allows for self-employed individuals to defer payment of the Social Security component of their self-employment taxes owed. Deferred tax amounts are due in two installments, with 50% by December 31, 2021, and 50% by December 31, 2022.
Healthcare and Medical
Remote Care Services Provided by High Deductible Health Plans
For plan years beginning before 2021, The CARES Act allows high deductible health plans to pay for expenses for telehealth and other remote services without regard to the deductible amount for the plan.
Break for Nonprescription Medical Products
The CARES Act allows amounts paid (after December 31, 2019) from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. Additionally, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.
Estate Planning and Gifting
As of January 1, 2020, the lifetime federal gift tax exemption is $11.58 million per person, and the annual gift tax exclusion is $15,000 per person. The increased federal gift tax exemption has enabled larger lifetime gifts, often at discounted values. Gifts of assets that have decreased in value due to the recent pandemic (such as marketable securities) efficiently leverage the large lifetime federal gift tax exemption and annual exclusion amounts available under current law.
By transferring lower-value assets now, individuals can use up less of their exemption amounts and retain more for future gifts. When the markets recover and asset values increase, that growth will occur outside the donor’s taxable estate. Additionally, if a recipient is in a lower income tax bracket than that of the donor, any post-gift income generated by the asset will be taxed at a lower rate, resulting in overall tax savings.
Individual taxpayers will be able to claim a $300 above-the-line deduction for cash contributions made to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction. The limitation on charitable deductions for individuals (generally 60% of modified adjusted gross income) will not apply to cash contributions made to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of modified adjusted gross income. No connection between the contributions and COVID-19 activities is required.
Similarly, the limitation on charitable deductions for corporations (generally 10% of taxable income) will not apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.
While the above list provides a brief overview of the most widely applicable provisions found in the CARES Act, it’s important to note that specific outcomes may vary based on each taxpayer’s particular situation. If you want to learn more about the CARES Act and how it may specifically benefit you and your family, please reach out to us.