The various stimulus packages provide relief to individuals and families in the form of direct payments, relaxed restrictions on retirement accounts and new guidelines on cash donations to public charities.
Deadlines have changed
The IRS has extended the deadline for filing 2019 Federal Income Taxes from April 15 to July 15, 2020. The IRS also confirmed that July 15, 2020 is the new deadline for contributions to IRAs and health savings accounts (HSAs).
As has been widely publicized, the Act directs the Treasury Department to make one-time payments "as rapidly as possible" to individuals whose adjusted-gross-income (AGI) is below certain thresholds and who cannot be claimed as dependents on anyone else's tax return.
- The baseline payment amounts are $1,200 per individual and $2,400 per married couple filing jointly, with an additional $500 for each dependent child under age 17.
- The AGI thresholds are $75,000 for individuals and $150,000 for married couples filing jointly. Above those thresholds, the payments are reduced until they are completely phased out at $99,000 of AGI for individuals and $198,000 for couples, but $10,000 is added to the upper limit of the phaseout for each qualifying child. For example, the payment to a person filing individually who has a dependent child under age 17 will still start to phase-out at $75,000 of AGI but, due to the child, the upper end of the phaseout will increase from $99,000 to $109,000. If there are two dependent children under 17, that upper limit would increase to $119,000.
- Eligibility is based on the taxpayer's 2019 income tax return; or if that return has not been filed when eligibility is determined, the taxpayer's 2018 income tax return; or if that return has also not been filed, the taxpayer's 2019 Social Security Benefit Statement.
- If the taxpayer's 2020 income tax return would result in a larger payment than the 2019 return, then the taxpayer will receive that additional payment. If the 2020 return shows that they should have received a smaller payment, there will not be a "claw-back" so the taxpayer will not have to give back any of the payment previously received.
- The Treasury Department is authorized to direct-deposit the payment into a bank account that the taxpayer has used to make an income tax payment or receive an income tax refund since and including 2018. The taxpayer will be sent notification of the payment by postal mail within 15 days and given a telephone number to call if the payment is not received.
- The payment is not taxable income to the recipient.
Retirement Accounts - No Required Distributions for 2020
In 2020, taxpayers are not required to take otherwise-required minimum distributions (RMDs) from certain retirement plans and accounts, including 401(k)s and IRAs. This provision is intended to provide relief to those who would otherwise have to "sell low" in order to generate cash and allow retirement accounts to try and recover from stock market losses.
Retirement Accounts - $100,000 Penalty-Free "Coronavirus-Related" Early Withdrawals
- Usually there is a 10% penalty for "early withdrawals" which are withdrawals from retirement accounts made by owners who have not yet reached age 59½, but this penalty is waived for "coronavirus-related" early withdrawals made during 2020. These withdrawals can be up to $100,000 from eligible retirement plans, including 401(k)s and IRAs.
- The funds taken as an early withdrawal are still included in the recipient's taxable income, but they can be spread over 3 years. Or, if the owner repays the distribution within 3 years, the withdrawal will not be subject to tax.
- "Coronavirus-related" withdrawals are those made:
- to an individual who is diagnosed with the novel coronavirus or the disease that it causes, COVID-19, by a CDC-approved test;
- whose spouse or dependent is so diagnosed; or
- who "experiences adverse financial consequences" as a result of: being quarantined, furloughed, or laid off, or working reduced hours, as a result of the virus or disease; being unable to work due to lack of child care as a result of the virus or disease; closing or reducing the hours of an owned-or-operated business as a result of the virus or disease; or other factors to be determined by the Treasury Department.
Increase in Loans From Employer-Sponsored Retirement Plans:
Coronavirus-affected individuals also have until September 23, 2020 to borrow increased amounts up to $100,000 from certain employer-sponsored retirement plans, such as 401(k)s, when permitted by the plan. They can also defer loan repayments otherwise due in 2020 for up to one year.
$300 Charitable Contribution Deduction for Non-Itemizers
In 2020, people who do not itemize deductions on their income tax return can deduct up to $300 of cash contributions to 501 (c)(3) charities (other than supporting organizations and donor advised funds), to private operating foundations and to pass-through private foundations. This deduction is in addition to the standard deduction. Only cash contributions are eligible for the deduction.
Suspension of Deduction Limit for Cash Contributions to Certain Organizations
In 2020, cash contributions to public charities (other than supporting organizations and donor advised funds), to private operating foundations and to pass-through private foundations can be used to offset up to 100% of an individual's "contribution base" (typically adjusted-gross income), instead of the usual 50-60%. Contributions of property other than cash remain subject to the usual limitations.
Unemployment Insurance has been Expanded
The Families First Coronavirus Response Act provides up to $1 billion in aid with more people qualifying for benefits and the amounts of weekly benefits will be increased. Notably, the CARES Act provides a special unemployment compensation program for gig workers, independent contractors, and self-employed individuals, and individual whose work histories might not otherwise qualify.
The Act also provides for payments of an additional $600 per week in unemployment compensation benefits above and beyond what an individual is otherwise entitled to under state law, for up to four months. Further, the CARES Act extends an individual’s ability to receive unemployment benefits by an additional 13 weeks, through December 31, 2020. However, individuals cannot receive unemployment compensation at the same time they are receiving paid sick leave from an employer.
The federal government has incentivized the states to waive the one-week waiting period by funding the costs. In addition, the federal government will fund the expanded unemployment benefits.
Federal Student Loan Payments, Interest Waived
The CARES Act, suspends payments and interest on federal student loans for 6 months retroactive to March 13, 2020. The Act makes emergency financial aid available up to the maximum amount of the Federal Pell Grant for the year and Federal work study payments to students who were unable to complete their work due to COVID – 19.
Students who are forced to withdraw from school may have a portion of their loan covering the semester cancelled. Requirements to return portions of grants or loan assistance will be waived for students who had to withdraw from school.
At the primary and secondary (K-12) school level, states may waive certain federal education requirements for this school year.
Employer Education Assistance
The CARES Act adds to the types of educational payments that are excluded from employee gross income for eligible student loan repayments made before January 1, 2021. An employee’s gross income doesn’t include up to $5,250 per year of employer payments, in cash or in kind, made under an educational assistance program for the employee’s education (but not the education of spouses or dependents). The payments are subject to the overall $5,250 per employee limit for all educational payments.
Sources: Wall St. Journal, Fidelity Investments, Proskauer, McLane Middleton