The CARES Act contains several provisions to get cash directly into the hands of taxpayers who are either currently employed or not working. These sources of cash include:
- Economic Impact Payments (Cash Rebates)
- Distributions from retirement plans such as 401(k) or IRA accounts
- Unemployment benefits
- Emergency Sick and Family Leave is required under the Families First Act
Provisions include programs to reduce current expenses:
- Although not part of the CARES Act, Fannie Mae and Freddie Mac announced that home mortgage payments can be deferred
- Student loan payments can be deferred
- Funding of 2019 IRA and HSA contributions can be delayed to July 15, 2020
- Disaster Relief Payments
Provisions include the ability to file amended tax returns to receive a refund of taxes paid in prior years:
- Retro-active repeal of the excess business loss limitation
- Retro-active modification of leasehold improvement depreciation life
- Repeal of elimination of Net Operating Loss Carrybacks
- Required minimum distributions have been suspended for 2020
- Increase in allowed deductions for charitable contributions made in 2020
The IRS shortly plans to begin processing a stimulus payment based upon a taxpayer’s most current (2019 or 2018) tax filing. The maximum payment is $1,200 per taxpayer ($2,400 for a joint return) and $500 per qualifying child under age 17.
The payment amount is phased out if adjusted gross income exceeds $150,000 (joint) or $75,000 (single). For each qualifying child, an additional $10,000 is added to the phase-out range.
The payment will be treated as an advanced credit for taxpayer’s 2020 tax year. If you are entitled to a larger credit it can be claimed on your 2020 tax return. It is unclear what the tax treatment will be if you receive too much.
Taxpayers that are claimed as a dependent on another’s tax return for 2019 or 2018 will not receive a rebate payment.
If you have not filed a return for 2018 or 2019 as perhaps your income was under the filing limit, you may need to file a return to claim your rebate. The IRS will use data from the social security administration (Form SSA-1099) to process rebates for taxpayers receiving Social Security payments. The IRS has not announced the filing cut-off date they will use to process returns but has indicated a simplified procedure will be developed to process rebates for taxpayers that have not filed. If you can’t wait and want to file you can use the IRS FreeFile system: www.irs.gov/filing/free-file-do-your-federal-taxes-forfree
Rebates will be sent via direct deposit if the IRS has this information from a 2019 or 2018 return. The IRS announced it is developing a web based portal for taxpayers to provide bank account information for direct deposit or updated addresses.
If your 2019 income will be higher than 2018 and you have not yet filed, consider delaying filing as your rebate will then be determined by your lower 2018 taxable income.
More information is available:
On-Line payment estimator: https://www.kiplinger.com/tool/taxes/T023-S001-stimulus-check-calculator-2020/index.php
Retirement Plan Distributions from defined contribution plans such as 401(k) plans, IRA’s and 403(b) plans up to $100,000 can be taken by taxpayers “impacted” by the pandemic. To qualify, the taxpayer must be diagnosed with COVID-19, a spouse or dependent of such individual, or experienced adverse financial consequences as a result of the pandemic (such as layoffs or reduced hours). The normal 10% early distribution penalty will not apply and taxpayers will report the distribution ratably as taxable income over a three year period.
Amounts withdrawn can be repaid back to the plan within three years of receipt thereby avoiding tax.
Consult with your financial advisor before taking a large distribution, as this can turn into a very expensive loan, as you will forgo the potential appreciation from the assets that were liquidated.
Plan Loans can now be obtained for the larger of 100% of the vested balance or $100,000.
IRS released a FAQ for retirement plan changes included in CARES Act. New Form 8915-E will be released to be used to calculate the taxable portion of eligible “coronavirus related distributions”. Distributions up to $100K can be taken in 2020 and are taxable ratably over three years. Amounts can be rolled over within the 3-year period. If previously taxed amounts are later rolled over, amended returns will be required.
- Labor & Workforce Development Agency: Benefits for Workers Impacted by COVID-19
Mortgage Deferral for borrowers with federally backed mortgages (FHA, VA, Fannie Mae or Freddie Mac). Borrowers can defer payments for 6 months with a possible 6 month extension. Contact your lender to determine if your loan is eligible.
- Freddie Mac: COVID–19 Response
Disaster Relief – Internal Revenue Code Section 139 allows employers to make tax free payments to employees to reimburse for, or pay reasonable and necessary personal, family, or living expenses incurred as a result of a qualifying disaster. Amounts paid cannot be made as income replacement payments. Qualified disaster relief payments can allow employees to receive tax-free income while payments are still deductible expenses of the employer. Eligible expenses can include: medication, medical expenses, hand sanitizer, increased child care costs, home office expenses, and nonperishable food/reserves.
Excess Business Loss Limitation is suspended retroactively to 2018. The 2017 Tax Cuts and Jobs Act limited the deduction of business losses (such as losses from Schedule C activities, partnerships and S-Corps) to $500,000 (joint), $250,000 (single) in excess of business income. Excess losses would be carried forward. This limitation has been repealed. Losses that were limited on tax returns filed for 2018 and 2019 can now be claimed on amended tax returns. Excess business losses will again be limited for tax years beginning after Dec. 31, 2020 and subject to the technical corrections made in the CARES Act.
Qualified Improvement Property (QIP) has been given a 15 year depreciation life effective Jan 1, 2018, making it eligible for 100% bonus depreciation. Generally, QIP includes leasehold improvements made to commercial buildings, restaurants and retail establishments after Jan. 1, 2018. This corrected a technical error in the 2017 Tax Cuts and Jobs Act that prevented these improvements from being eligible for bonus deprecation. Because the change is retro-active to 2018, amended returns will need to be filed to obtain the benefit from increased depreciation deductions.
Net Operating Losses for tax years 2018, 2019, 2020 can be carried back five years to generate tax refunds. This repeals the 2017 Tax Cuts and Jobs Act elimination of operating loss carrybacks. Also repealed is the 80% taxable income limitation of net operating losses carried forward to 2018, 2019, 2020. Amended returns can be filed to obtain the benefit from the carrybacks.
Required Minimum Distributions have been suspended for 2020. Both required minimum distributions for tax year 2020 and for tax year 2019 (payable by April 1, 2020) have been suspended. This rule applies to inherited IRA’s allowing beneficiaries to skip one year of distributions.
Guidance is expected for the treatment of taxpayers that have received their required minimum distributions before the CARES Act was enacted.
If you have any questions about the CARES Act and how it affects you and your family, please contact us here at ASL.
If you own a business, please refer to, CARES Act – Business Provisions.
The provisions of the Act are compliance and guidance interpreting the Act is being issued frequently. The above information is based upon information currently available and is subject to change as new guidance is issued.