The Cares Act: How Coronavirus Relief Affects Your Taxes and Planning

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Coronavirus. COVID-19. It’s all anyone can talk about these days, and with good reason. And while concern for people’s health is paramount, it also makes sense to wonder how this pandemic is going to affect economic concerns—on a global, national, and very personal level.

Enter the Coronavirus Aid, Relief, and Economic Security Act: the CARES Act. This 880 page piece of legislation addresses everything from improving the availability of COVID-19 testing for individuals to helping businesses stay afloat in this uncertain time. Let’s talk about how the CARES Act might affect your finances, taxes, and planning for the future.

Recovery Rebates

The piece of the Act that most people have heard about is the stimulus for individuals, otherwise known as “recovery rebates.” After much back and forth, here are the basics:

Based on your 2019 tax return (or 2018 if you haven’t yet filed 2019), the government is going to cut you a check. The check will be $1,200 for each individual, $2,400 for a married couple filing jointly, plus $500 for each child under the age of 17. The amount of the check will not depend on your tax liability. Whether you owed $500 or $5,000, or got a tax refund, you will still get your rebate check.

That said, rebates do begin to phase out at higher income levels. If your adjusted gross income (AGI) is $75,000 for an individual or $150,000 for a married couple filing jointly, you will lose $5 of rebate payment for every $100 in income over those amounts. (If you have kids for whom you’re entitled to payments, the thresholds will be higher.)

Access to Retirement Funds for Coronavirus Costs

Traditionally, there have been steep penalties and taxes for dipping into your retirement funds early. But desperate times, which these surely are, call for desperate measures. If you need access to those funds for coronavirus-related costs, you may be able to take a distribution of up to $100,000 during 2020 without incurring a penalty (though you’ll still need to pay the tax on the withdrawal; however, you can spread tax payments out over three years).

What qualifies as a coronavirus-related distribution? You must have been diagnosed with SRS-COV-2 or COVID-19 using a CDC-approved test for the virus, or have a spouse or dependent diagnosed, and you must be experiencing negative financial consequences as a result. This could mean that you were quarantined, laid off, furloughed, had your work hours reduced, or unable to work because you couldn’t find child care.

If you are able, you can repay the distribution to your account within three years to avoid having it recognized as income.

If you are able, you can repay the distribution to your account within three years to avoid having it recognized as income.

Required Minimum Distributions

If you would ordinarily be required to take a required minimum distribution (RMD) from your retirement plan during 2020, you no longer need to do so if you don’t want to. For 2020 only, the CARES Act waives the mandate of taking an RMD.

Encouraging Charitable Contributions

The Tax Cuts and Jobs Act (TCJA) a few years ago nearly doubled the standard deduction for income tax filing, making it more attractive for many people to take the standard deduction, rather than itemizing deductions. For many people, this reduced or eliminated the benefit to making charitable deductions, since they could no longer itemize them.

With the economic havoc wrought by the coronavirus, more people than ever are in need of help from charities. At the same time, fewer people have the resources to donate. The CARES Act offers an incentive for those who can donate to do so.

The Act lets individuals contribute cash up to $300 to charities that qualify. The contribution may then be deducted “above the line” for purposes of determining adjusted gross income (AGI). Not only may the taxpayer take the standard deduction, but they get to deduct the amount of their donation from their AGI.

The good news: not only can taxpayers take this deduction for tax year 2020, but going forward, as well. The bad news: this additional deduction is available only to those taxpayers who do not itemize their deductions—in other words, only to those who use the standard deduction.

Fortunately, there is some good news for those who itemize their deductions, too. The CARES Act lifts (at least temporarily) the limits on charitable giving imposed by the TCJA. That Act limited contributions to public charities to 60% of the taxpayer’s AGI. The CARES Act lets taxpayers deduct cash contributions up to 100% of AGI for tax year 2020. Any contributions in excess of 100% of AGI can be carried over as deductions for the next five years. (Limits on corporate donors are raised from 10% of adjusted taxable income (ATI) to 25%.)

In addition to these tax measures, the federal government has already extended the deadline for tax filing and payment to July 15. It’s possible more tax measures will be needed in the future to help individuals and bolster the economy.

Of course, the measures we’ve touched on briefly here are only a portion of the steps the federal government has taken to support individuals and businesses. Watch this space for an upcoming post on additional details and how the CARES Act will affect small businesses in the weeks and months to come.

If you have questions about what the CARES Act means for you, your family, and your business, we invite you to contact our law office to schedule a remote consultation.

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