Clarifying the CARES Act – Individuals

This is the first blog in a series of two focused on the CARES Act. The first blog focuses on impacts to individuals while the second focuses on impacts to businesses.

With new information coming at us daily it is difficult to really understand the elements of the CARES Act, which was signed into law on Friday, March 27, 2020. The $2.2 trillion coronavirus economic stimulus bill is meant to provide relief for individuals and businesses negatively impacted by the coronavirus pandemic. Here’s a look at some of the key provisions included in the bill and what they may mean for you.

Direct payments. If you are an American who pays taxes you will receive up to $1,200, and married couples will receive $2,400, plus an additional $500 per child as part of the stimulus bill. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples. This amount will be reduced for higher income taxpayers and is completely phased-out for joint filers with incomes exceeding $198,000. The IRS will base these amounts on your 2019 tax return if filed, or your 2018 return if 2019 hasn’t been filed yet.

This stimulus money will appear as a special tax credit on the tax return you file in 2021 for the 2020 tax year — a tax credit that wouldn’t have been there if it wasn’t for these stimulus checks. However, this money is not considered income. It won’t be taxable and it won’t affect your income tax bracket for 2020. In addition, if your stimulus amount is reduced or eliminated because of the income limits (based on your 2019 return) you may still be able to claim the credit on a 2020 return if your 2020 income drops below the phase-out limits.

Charitable contributions. For tax year 2020, there are two changes to the way charitable contributions are treated.

  1. The CARES Act allows for up to $300 per taxpayer ($600 for a married couple) in an above-the-line deduction (expenses that are deducted to calculate your adjusted gross income) for charitable gifts made in 2020 and claimed on taxes in 2021. This means that you can lower your income tax bill by donating, even if you take the standard deduction on your taxes.
  2. The CARES Act increases the existing cap on charitable cash contributions if you itemize, raising it from 60% of adjusted gross income to 100% in 2020.

Required Minimum Distributions. Penalties and interest for failing to take your Required Minimum Distributions (RMD) for 2020 have been waived. This rule applies to all Traditional IRAs, Simplified Employee Pensions and Simple IRAs, as well as Employer-Sponsored Plans such as 401(k)s and 403(b)s. Additionally, if you are the beneficiary of an Inherited IRA and have been taking required distributions, this waiver for 2020 applies to you too. As of right now, this waiver only applies to 2020 required distributions. If you have already taken your RMD there is an ability to recontribute the amount to your account and treat it as a rollover on your 2020 taxes.

Early withdrawal penalty. The 10% early withdrawal penalty is waived for individuals negatively impacted by the coronavirus for distributions up to $100,000 from retirement accounts and attributable income would be taxed over three years. If this is something you’re considering, please check with your plan because these new provisions under the act are optional. Your plan doesn’t have to permit them even if they already offer hardship withdrawals or loans.

New information and guidance is released on a daily basis, these are just some of the highlights that apply specifically to individuals under the CARES Act. For details on the CARES Act, please visit: https://www.congress.gov/bill/116th-congress/senate-bill/3548/text.

The material and information contained here is for general informational purposes only. You should not rely upon the material as a basis for making any business, legal or other decisions. Please contact your advisor for detailed information.

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