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3/26/20 Update: The House passes and the President signs the CARES Act.
Congress has been working to pass the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which aims to provide economic relief to individuals and businesses facing hardship or financial ruin due to the COVID-19 pandemic. While we strive to understand every detail of the 880 pages of the Act, and Congress followed by the President finalizes it, we will put actionable items in your hands today assuming it will pass.
This article focuses on the tax relief available for individuals. You can see tax relief measures available for businesses by clicking here and the details of the business paycheck protection loans by clicking here.
What tax relief is available for individuals?
Certain taxpayers will start to see quick relief in the form of direct payments from the government with Recovery Rebates. These Recovery Rebates will be in the amount of $1200 per person and $500 for each qualifying child. Like many tax benefits, there are income limitations to receive the benefit. The phaseout is based upon Adjusted Gross Income (AGI) as follows:
- Single Filers: $75,000 of AGI
- Joint Filers: $150,000 of AGI
- Head of Household Filers: $112,500 of AGI
The above AGI amounts are the beginning of the phaseout range and will also depend on the number of qualifying children, if any, a filer claims. As a point of reference, a single filer with no children will be totally phased-out of the Rebate at AGI of $99,000. A married couple filing jointly with two children will be phased out at $218,000 of AGI.
This is an advanced payment of a 2020 credit, but to get money in the hands of taxpayers quickly, the government will be utilizing 2018 and 2019 tax filings to determine eligibility. If your 2018 and 2019 income is above the phaseout ranges, you will likely claim the rebate on your 2020 tax filing this time next year if your income drops. It is unclear whether the Recovery Rebate will be paid back for those who experience an increase to income in 2020 so that they do not qualify yet received a Rebate based on their prior lower income.
Charitable Contribution Deduction
Historically, those who do not itemize their tax deductions are unable to claim a deduction for charitable contributions. As part of the CARES Act, non-itemizers will be able to deduct up to $300 as an “above the line” deduction, which means if you do not itemize, you can still claim a $300 deduction for a donation to a qualified charity.
For those who are contributing substantial amounts, the maximum contribution amount has also been increased.
Required Minimum Distributions
For those who may otherwise need to take a Required Minimum Distribution (RMD) from their retirement account, the CARES Act suspends the RMD for 2020.
Retirement Plan Distributions
A lot of people’s primary savings may be locked up in a retirement account like an IRA, which if accessed early, may carry penalties in addition to being subject to income tax. The CARES Act allows relief from the 10% early distribution penalty. It also allows the income tax liability to be spread over three years for those who have been impacted by COVID-19 either directly through medical needs or those who have experienced financial hardship from a layoff, reduced hours, furlough, taking care of children, or quarantine.
What steps should you consider now?
We all will be learning more about the CARES Act each day. Some of the details may be evolving or even changing altogether. We’re hoping the above may help, even just a little. Knowing that, here are a few things to consider right now:
- If your 2018 income was higher than your 2019 income and you may fall below the phaseout ranges, you may want to consider filing your 2019 tax return ASAP in hopes of receiving the Recovery Rebate.
- If your 2019 income is higher than 2018 and you otherwise may fall below the AGI phaseout ranges, you may want to consider holding off on filing your 2019 tax return in hopes of receiving the Recovery Rebate. However, for wage earners, the IRS may look at other records also.
- If your address has changed since the filing of your last tax return, you may want to file a change of address form ASAP, or even file your 2019 tax return now.
- If you ordinarily do not itemize your deductions but would like to help out a charity, please be sure to retain a receipt of your donation.
- If you do not need to access your retirement account, you may want to consider not taking your RMD.
- If you are experiencing financial hardship and need to access your retirement account, you may have some relief available. Keep in mind that those distributions may still be subject to income tax.
If you have questions about how the CARES Act may impact you, please feel free to contact us at 949-860-9892 or email@example.com.