Craig Swindlehurst CPA, Tax Manager at Larson & Company, specializes in tax planning and preparation for individuals, small businesses, and captive insurance companies.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES, was quickly passed and ratified in a bipartisan effort to relieve some of the strain from the economic fallout due to the impact of the COVID-19 outbreak. We have highlighted below what we feel are the most important aspects of the act for individuals.

 

(1)  Tax Due Dates & Payments – Income Tax Returns & Income Tax Payments

  • The due date for tax returns normally due on April 15 is now July 15.  Any payments normally due on April 15 (2019 extension, 2020 1st quarter estimated tax) are also now due on July 15.  The 2020 second quarter estimated tax payments are currently still due on June 15.

 

(2)  Recovery Checks

  • The government has approved cash payments to American households subject to certain income limits, which limits are based off of the individual’s 2019 tax return.  If a 2019 tax return has not been filed, the limitations will be based on the individual’s 2018 tax return.
  • Single individuals are eligible to receive $1,200, and joint filers are eligible to receive $2,400.  An additional $500 per child will also be granted.
  • The potential payment will be phased out by $5 for every $100 of income above the threshold amounts.  The threshold and phase-out amounts are as follows:
    • Single Filers – $75,000 (completely phased out at $99,000)
    • Head of Household Filers – $112,500 (completely phased out by $136,500)
    • Joint Filers – $150,000 (completely phased out by $198,000)
  • If a taxpayer does not get the full rebate amount because their income exceeds the threshold amount, they could eventually receive the full rebate if their 2020 income (based on their 2020 tax return) falls below the threshold.
    • Note that the reverse does not hold true – if a taxpayer takes the full rebate amount this year, but then has 2020 income greater than the threshold amounts, they will not be required to pay back any portion of the rebate.
  • Money will be transferred electronically to individuals who registered their bank account information with the IRS in the past two filing years for a tax refund.  Treasury Secretary Steve Mnuchin projected a three-week interim between the bill’s passage and those payments hitting individual bank accounts.

 

[Side note & planning opportunity – if 2019 income will exceed the threshold but 2018 income did not, wait on filing the 2019 tax return until after checks have been issued.  Flipped around, if 2018 income is over the threshold but 2019 is not, file as quickly as possible so that payment will be based off of 2019 return]

 

(3)  Retirement Provisions

  • The 10% penalty associated with early withdrawals from qualified retirement plans is waived for COVID-19 related distributions up to $100,000.  To qualify, the distribution must be made during the 2020 calendar year to (1) an individual who is diagnosed with COVID-19, or who has a spouse or dependent diagnosed with COVID-19, or to (2) an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoffs, or reduced hours due to COVID-19.  Time away from work to due to lack of child care also qualifies.
  • Income attributable to the early withdrawal is subject to tax over a three-year period.
  • The taxpayer may, within three years of withdrawal, re-contribute the withdrawn amount without regard to that year’s cap.
  • Individuals, regardless of whether they have been affected by the pandemic or not, will be able to waive the rules regarding required minimum distributions (RMDs) for tax year 2020 and elect to keep those funds in their accounts.

 

(4)  Assistance Related to Student Loans & Education Expenses

Employer Paid Educational Assistance

  • An individual can exclude from taxable income up to $5,250 of payments made by an employer against the individual’s education costs, including student loans, tuition, and books.  This applies only to payments made after the date of enactment and before 1/1/2021.
  • The payments can be made to either the employee or to the lender directly in the case of student loan payments.
  • The expenses must be related to the employee’s education, and not to the education of a spouse or dependent.
  • Individuals cannot deduct the student loan interest related to these employer payments.  However, an employer can make principal only payments and allow the employee to make all the interest payments, thus maximizing the employee’s deduction.

Deferred Student Loan Payments & Interest

  • Individuals will not be required to make federal student loan payments through September 30, 2020.  During this time, interest will not accrue.
  • Note that there is no forgiveness of student loans, just the temporary deferral of payments and the accrual of interest.
  • The relief is applicable only to federal student loans, not private student loans.

 

(5)  Charitable Contribution Limitations & Incentives

  • On 2020 tax returns, individuals not itemizing their deductions will be allowed to take a $300 above-the-line deduction for charitable contributions.
  • For individuals who itemize their deductions, the 60% adjusted gross income limitation is suspended for 2020 for cash contributions, excluding those made to donor-advised funds.

 

(6)  Enhanced Unemployment Benefits

  • The CARES Act offers an additional $600 of unemployment benefits per week from the federal government to unemployed individuals, on top of whatever they are receiving from their home state.
  • Additionally, state-level unemployment insurance would be extended by an additional 13 weeks.  The extended benefits would last through December 31, 2020.
  • This increased payment will last for four months and will cover certain individuals typically not covered by unemployment insurance, such as part-time employees, freelancers, independent contractors, gig workers, and the self-employed.

 

This is a lot of information and we have tried to highlight the items that we thought might be more applicable to our clients.  There are many other provisions as well, and if you hear of any about which you have questions please let us know and we will be happy to try and answer the questions as best we can.  If there are items above that you would like us to look into more, let us know and we can try and help.  Note that we are still waiting for a lot of the practical application for these provisions, so there will be questions that we won’t be able to answer right away but it still doesn’t hurt to ask them.

Our offices are open to employees only, but many of our employees have chosen to work from home for the foreseeable future. Please feel free to e-mail us with any questions you may have.