How the CARES Act Benefits Individual Taxpayers
- The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides significant benefits for certain individual taxpayers, including a payment of $1,200 ($2,400 for a married couple filing jointly) plus an additional $500 for each qualifying child under the age of 17 at year-end.
- To prevent individuals from being forced to liquidate assets in their retirement accounts at greatly reduced values to fund a Required Minimum Distribution (RMD), individuals may waive such RMDs from their IRAs and/or their 401(k), 403(b) or 457(b) accounts during 2020.
- To encourage charitable giving during a time of tremendous need, the limitation of 60 percent of adjusted gross income (AGI) for cash contributions to qualifying organizations that would normally apply when calculating one's deduction for a charitable contribution is suspended in 2020, if the taxpayer so elects.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, is a $2 trillion economic stimulus measure to address the economic fallout of the coronavirus pandemic. It provides significant benefits for certain individual taxpayers.
Eligible individuals are entitled to a payment of $1,200 ($2,400 for a married couple filing jointly) plus an additional $500 for each qualifying child under the age of 17 at year-end. For individuals with an adjusted gross income (AGI) in excess of $75,000 ($150,000 for a married couple filing jointly), the payment is reduced and ultimately phases out when an individual earns $99,000 in AGI ($198,000 for a married couple filing jointly). The taxpayer's AGI will be based on their 2019 income tax return. However, if an individual has not yet filed a 2019 tax return, the AGI from their 2018 tax return will be used. For individuals who do not file a tax return, but receive a benefit statement from Social Security, the benefit statement will be referenced by the Treasury to determine their eligibility for a rebate.
An individual whose payment would be greater based on the AGI reported on their 2020 tax return than that based on their 2019/2018 tax return, will receive a credit for this difference on their 2020 tax return. However, as the law is currently drafted, if the payment received is greater than what a taxpayer is owed based on their 2020 tax return, there appears to be no mechanism to 1) repay the excess payment or 2) recognize the excess amount as income. A taxpayer who has not filed their 2019 tax return will want to consider whether doing so in the near term will increase or decrease their stimulus payment and react accordingly. The postponement of the IRS filing deadline to July 15, 2020, gives taxpayers and tax preparers more flexibility to make this decision.
Required Minimum Distributions
To prevent individuals from being forced to liquidate assets in their retirement accounts at greatly reduced values to fund a Required Minimum Distribution (RMD), individuals may waive such RMDs from their IRAs and/or their 401(k), 403(b), or 457(b) accounts during 2020. Please note, however, that such waiver is not permitted for defined benefit plans. The waiver also applies to individuals who attained age 70 ½ during 2019, and had yet to take their 2019 RMD, previously required to have been taken by April 1, 2020. As the act applies to all 2020 RMDs from IRAs, a designated beneficiary of an inherited IRA who had elected to receive RMDs based on their own life expectancy (a concept known as "stretching an IRA") will also not be required to take a RMD in 2020.
An individual who had already taken their RMD for tax year 2020 may be able to roll their RMD back into an IRA (or company plan) and avoid paying income tax on this distribution for tax year 2020. To be eligible for this rollover treatment, the distribution must be deposited back into an IRA (or company plan) within 60 days of receipt of the distribution and another IRA rollover must not have been taken place during the previous 12 months.
To encourage charitable giving during a time of tremendous need, the limitation of 60 percent of AGI for cash contributions to qualifying organizations that would normally apply when calculating one's deduction for a charitable contribution is suspended in 2020, if the taxpayer so elects. In addition, an individual who does not itemize his or her deductions may take an above the line deduction of up to $300 from his or her AGI for cash contributions made to qualified charitable organizations in tax year 2020. In both cases, a qualifying organization is a charitable organization as defined in Section 170(b)(1)(A) of the Internal Revenue Code, other than a donor-advised fund or a supporting organization under Code Section 509(a)(3), and a cash contribution does not include the donation of appreciated property, such as securities.
How Holland & Knight Can Help
For questions regarding the CARES Act and how these changes can affect you and your family's financial situation, please contact a member of Holland & Knight's Private Wealth Services Group.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.