The CARES Act: A Closer Look at Provisions for Individuals

The Coronavirus Aid, Relief, and Economic Securities Act (CARES Act), enacted a little over two weeks ago, put $2.2 trillion in relief funds into action to assist the American people, our businesses, and our economy during our nation’s state of crisis.

The Act is lengthy and covers a significant amount of information. To ensure our clients know exactly what this legislation provides, we want to break down this legislation further and take a look at some provisions that target individuals. Specifically, we want to focus on Recovery Rebates, retirement provisions and the temporary waiver of Required Minimum Distributions, and the modification of the limitation on losses for non-corporate taxpayers.

2020 Recovery Rebates (Economic Impact Payments)

This provision for individuals is what you might term an “automatic benefit.” Most eligible for a Recovery Rebate (or what the IRS is now calling “Economic Impact Payments”) will receive it without any action required on their part. The Recovery Rebate is determined based on your filing status, number of qualifying children, and adjusted gross income (AGI). If you have already filed your 2019 return, the IRS will use that data to calculate your rebate amount. If you haven’t filed your 2019 return, 2018 data will be used. If neither year has been filed, you may still be eligible. To expedite the process, the IRS is encouraging taxpayers to file, at least for 2018, as quickly as possible.

Single Filers:

  • if AGI under $75,000, will receive a recovery rebate of $1,200 
  • if AGI exceeds $99,000, and you do not have children, you are not eligible
  • if AGI is above $75,000, but below $99,000, recovery rebate will decrease by $5 for every $100 over $75,000
  • each qualifying child under the age of 17 adds an additional $500 to your recovery rebate

Joint Filers:

  • if AGI under $150,000, will receive a recovery rebate of $2,400 
  • if AGI exceeds $198,000, and you do not have children, you are not eligible
  • if AGI is above $150,000, but below $198,000, recovery rebate will decrease by $5 for every $100 over $150,000
  • each qualifying child under the age of 17 adds an additional $500 to your recovery rebate payment

Head of Household Filers:

  • if AGI under $112,500, will receive a recovery rebate of $1,200
  • if AGI exceeds $136,500, you are not eligible
  • If AGI is above $112,500, but below $136,500, recovery rebate will decrease by $5 for every $100 over $112,500
  • each qualifying child under the age of 17 adds an additional $500 to your recovery rebate payment

Social Security Recipients and Railroad Retirees:

  • may otherwise not be required to file a tax return, but are still eligible without filing a return
  • will receive a $1,200 recovery rebate
  • payments for qualifying children will not be added, as dependent information is not reported through Forms SSA-1099 and RRB-1099

Your Recovery Rebate will be deposited directly if your banking account information was provided when your return was filed. If you did not use direct deposit when filing, the IRS is in the process of developing a web-based portal for individuals to provide them with their banking information. They want people to access these funds quickly, rather than waiting for checks to be issued and mailed.

Special Rules for Use of Retirement Funds

Generally, distributions from retirement plans prior to age 59 ½ are subject to both income tax and a 10% early distribution penalty. Under CARES Act relief, distributions for Coronavirus-related (those either contracting the virus or suffering a financial hardship resulting from it) may take a distribution of up to $100,000 without incurring the 10% penalty, regardless of their age. Further, if they repay the distribution within 3 years, it will be treated as a rollover without being subject to income tax. If they are not able or willing to repay the distribution within 3 years, then it is subject to income tax. However, it is included in income ratably over the 3 years. Bottom line is, the distribution may either be used as an interest-free loan for 3 years, or it may be taxed as income spread over 3 years without the usual 10% penalty.

Participants in 401(k) plans have always had the ability to receive a loan from their account of up to 50% of the balance. The CARES Act allows 401(k) plans to increase that to 100%, for loans taken through September 23, 2020. The previous 5-year repayment period is increased one year, to 6 years, and any outstanding loan payment due between March 27, 2020 and December 31, 2020, is delayed for one year, with interest continuing to accrue.

Temporary Waiver of Required Minimum Distribution (RMD) Rules for Certain Retirement Plans and Accounts

Distributions from retirement plans must commence annually, upon reaching age 72 (age 70 ½ prior to 2020). The CARES Act has essentially suspended these rules for 2020, with RMDs required again in 2021. If someone has already taken a 2020 RMD, and 60 days has not passed since the distribution, then it may be possible to reverse the transaction by restoring the distribution back into their retirement account, without taxation.

Modification of Limitation on Losses for Taxpayers Other Than Corporations

The Tax Cuts and Jobs Act enacted a limitation on the amount of business loss a noncorporate taxpayer could take in any one year, effective for tax years beginning after December 31, 2017. These losses were called excess business losses. Any disallowed excess business loss was to be treated as part of the taxpayer’s net operating loss carryover to the following year. Basically, business losses were able to offset only up to $250,000 of nonbusiness income for a single filer, and up to $500,000 of nonbusiness income for a joint filer, in 2018. Those figures were adjusted for inflation in 2019.  Business losses in excess of those threshold amounts were deemed excess business losses and subject to the limitation.

The CARES Act has retroactively postponed the excess business loss limitation until 2021. Therefore, taxpayers who filed 2018 or 2019 income tax returns and were subject to the excess business loss limitation should amend their income tax returns.

Stay tuned…

We are committed to keeping our clients and community up-to-date on legislative changes. We will be publishing articles on numerous sections within the CARES Act in the coming weeks. We welcome you to contact us for additional information, or with questions on these individual provisions and related matters.

 

by Daniel Doiron, CPA