By a unanimous vote on March 25, 2020, the Senate passed a third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748, the Act). This article discusses the tax relief provisions for individuals that are contained in the Act.
$1,200 TAX CREDIT (REBATE)
Under the CARES Act, an eligible individual is allowed an income tax credit for 2020 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.
Phase Out: The amount of the credit is reduced (but not below zero) 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. At $198,000/$150,000 in 2019 AGI, no rebate will be paid.
WHEN: Even though the credit is technically for 2020, the law treats it as an overpayment for 2019 that IRS will rebate as soon as possible during 2020. Most eligible individuals won't have to take any action to receive an advance rebate from IRS.
10% RETIREMENT PLAN PENALTY WAIVED!
Normally, a distribution from a qualified retirement plan is subject to a 10% additional tax unless the taxpayer is age 59 or older.
The CARES Act provides that the 10% additional tax does not apply to any coronavirus-related distribution made by a qualified inidividual, up to $100,000. HOWEVER, this will still be taxable income though it will be recognized over the next three tax years (also, see recontribution below).
A qualifed individual is anyone or their spouse or dependent who:
- Is diagnosed with COVID-19
- Experiences adverse financial consequences such as job loss, furlough, lay-off, closure school, etc.
- Experiences adverse financial consequences due to closure or reduced income in their business.
RECONTRIBUTION: Taxpayers will be able to refund their retirement account anytime over the subsequent three years. If recontributed before year end, it should offset the income resulting in no net taxable income for 2020.
2020 RMD WAIVED!
Any Required Minimum Distribution from a qualified plan or IRA that would normally have been required in 2020 is waived.
CHARITABLE CONTRIBUTION ABOVE THE LINE!
Generally, charitable contribution deductions are taken on Schedule A which means that taxpayers who use the standard deduction do not get a benefit. Now, taxpayers will get a $300 deduction regardless of whether they itemize or not.
UNEMPLOYMENT FOR SELF-EMPLOYED
The bill will provide that self-employed will qualify for unemployment insurance through 12/31/2020. Contact your local unemployment department for more details.