What are the Tax Benefits of the CARES Act?
On March 27, 2020, U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Act has several tax benefits for individuals and businesses, as well as implications for retirement account owners.
CARES Act tax benefits for individuals
Most people will receive a “Recovery Rebate” of $1,200 for an individual ($2,400 for joint taxpayers), plus $500 for each child under 17. Every person qualifies, even if they have no income, or don’t enough income to be required to file a tax return, or their only income is Social Security, as long as the individual is not a dependent on someone else’s tax return and the person has a work-eligible Social Security number. The Act says that the Recovery Rebates will be distributed “as rapidly as possible.”
If you had a refund on your 2019 tax return (or 2018 if you haven’t filed 2019 yet) and had a refund direct deposited to a bank account the Recovery Rebate will be deposited to the account information on the tax return, and it’s estimated to happen in about three weeks or so. If you didn’t have bank account information on your tax return you’ll get a paper check and that will take more time. The Recovery Rebate is not taxable income because it’s advance payment of a tax credit that will be taken on the 2020 federal income tax return.
The amount of the Recovery Rebate will be based on the 2019 tax return (or the 2018 return if the 2019 return hasn’t been filed). Individuals are eligible for the full advance payment amount if adjusted gross income (line 8b on a 2019 tax return) is less than $75,000 for singles, $112,500 for heads of household, and $150,000 for joint taxpayers. Above those amounts eligibility for the Recovery Rebate partially phases out (eligible for a partial amount) by a formula until it fully phases out (no eligibility) at $99,000 for single taxpayers with no children and $198,000 for joint taxpayers with no children.
The payment amount is then reconciled on a 2020 tax return using 2020 income. For example, if you don’t get a Recovery Rebate (or get a lower amount based on the eligibility above), but your 2020 income is lower, you’ll get a tax refund for the amount you were entitled to after filing your 2020 tax return. If you got a Recovery Rebate but your 2020 income is higher than what Recovery Rebate amount you were eligible for based on the eligibility above, you won’t have to pay back the excess. The tax credit is “refundable”, meaning that if you have no 2020 tax liability, or 2020 tax liability lower than the rebate amount you’re entitled to, you’re entitled to keep the rebate amount.
If you make charitable contributions but don’t itemize deductions you can take a deduction of up to $300 of charitable contributions (in addition to taking the standard deduction). If you make charitable contributions and you do itemize deductions the usual percentage limit on the amount of your income you can offset by charitable contributions is suspended for 2020.
Lastly, employers may contribute up to $5,250 during 2020 toward paying student loans on your behalf, and the payments are tax-free to the employee.
CARES Act benefits for retirement account owners
If you, your spouse or dependent have been diagnosed by a test, or experience adverse financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours, or unable to work due to lack of child care, the Act waives the 10% penalty for premature distributions from retirement plans and IRA’s, up to $100,000 of withdrawals. Amounts withdrawn can be paid back any time during three years after the withdrawal, even if the payback would be more than contribution caps. Withdrawals still count as income subject to regular income tax, but you can include the amount equally over three years beginning in the year of withdrawal.
If your retirement plan allows loans, and if you’ve been effected by the virus emergency (like in the previous paragraph) the maximum loan amount is increased from $50,000 to $100,000 and increases the percentage limit for loans from half the present value of your benefit to the present value of your entire benefit.
The “required minimum distribution” (RMD) rules generally require annual withdrawals from a 401(k), IRA or similar retirement account beginning with the year you turn 72 years old (or the year you turned 70½ years old if that happened in 2019 or earlier). The Act suspends that requirement for 2020 (you can still take withdrawals if you want to, but you’re not required to take the RMD).
CARES Act tax benefits for businesses
Employers whose businesses were disrupted due to virus-related shutdowns, and businesses experiencing a decrease in gross receipts of 50 percent or more when compared to the same quarter last year, are eligible for a 50 percent refundable payroll tax credit on the first $10,000 of compensation paid per employee, including employer-paid health benefits, between March 12, 2020 and December 31, 2020. If the business has more than 100 employees, the credit is available for employees retained but not currently working due to the crisis. If the business has 100 or fewer employees, the credit is available for all employees.
For wages paid during 2020, the Act postpones the due date for depositing employer Social Security payroll taxes (the employer’s matching 6.2% amount), and 50% of Social Security self-employment taxes. The taxes are instead due half on December 31, 2021 and half on December 31, 2022.
To assist businesses that have debts, or might have to incur debts because of the crisis, the usual limit on a business deducting interest paid on debts is, for 2019 and 2020, increased from a limit of 30% of their adjusted taxable income, to 50%.
Technical provisions also benefit businesses that have losses for 2018, 2019, or 2020, or are subject to alternative minimum tax.
If you have questions about navigating the CARES Act tax benefits, please contact your tax advisor. You may also consult legal counsel with regards to your estate plan.
A member of Gross McGinley’s Wills, Trusts & Estates team and Business Services Group, Partner Michael Henry provides tax and legal guidance to businesses and individuals throughout the Lehigh Valley.