Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Tax Benefits for Individuals

Graphics by Anna Gray.

On March 27, 2020, Congress passed and the administration signed the third in a series of major Coronavirus relief bills called the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The purpose of the Bill is to stimulate the American economy during the Coronavirus pandemic. The CARES Act is arguably the largest change to the U.S. tax system in decades outside of the 2017 Tax Cuts and Jobs Act (TCJA) reforms.

Our last post covered CARES Act provisions for businesses. This week, we take a look at provisions which affect individuals:

Tax Rebates

The $1,200/$2,400 rebate check is the most well-known of all stimulus measures in the CARES Act. Most rebates were paid electronically to eligible taxpayers by the IRS based on prior tax filing information. Taxpayers who did not provide the IRS with bank direct deposit information, or who did not qualify may face delays in their payments are provided by paper check.

For individuals, the IRS provides a comprehensive site regarding the economic impact payments. One can access the site at the link below:

IRS Get My Payment (External Link)

The IRS has an online portal to check the status of a payment, as well as frequently asked questions (FAQ) and instructions for filing a return for tax years 2018 or 2019 if needed.

Rebates are provided as an advanced funding mechanism against 2020 income. The rebate payment is a refundable tax credit on the 2020 return, so persons who receive less than the full rebate amount based on 2019 or 2018 income may receive the difference once the 2020 tax return is filed (early 2021).

Withdrawals from Retirement Plans

There are a number of tax advantaged provisions in the CARES Act for persons who must withdraw or borrow against qualified retirement funds (most retirement plans, including IRAs). First, withdrawals up to $100,000 receive several benefits that would not normally be available:

– Persons under 59 ½ can withdraw during 2020 without a 10% early withdrawal penalty if the withdrawal is for Coronavirus purposes. How or whether the IRS will enforce penalties against non-Coronavirus withdrawals is unknown, however, the withdrawal is still limited to the $100,000 cap.

– Withdrawal amounts may be repaid over the next three years and treated as a tax-free rollover. There is no cap on contributions to a plan under this scheme.

– Distributions not repaid within the three year period (above) are taxable income, however, the amount can be included in income ratable over three years. This lessens the income tax burden by effectively breaking up counting income in part over multiple years.

“Coronavirus purposes” are loosely defined as applying to someone where they or their spouse is either:

– diagnosed with Coronavirus;

– experiences financial consequences of being quarantined, furloughed, or laid off because of the virus;

– is unable to work due to lack of childcare because of the virus; and,

– other factors to be determined by the Treasury Department.

Proof of “Coronavirus purposes” may be as simple as an individual’s certification that the withdrawal was virus related. The Treasury has not issued comprehensive guidance yet on this subject and it is unclear how enforcement action, if any, will work.

Loans from Retirement Plans

Loans from qualified retirement plans are currently limited to $50,000. Under the CARES Act, loans of up to $100,000 are permitted from qualified plans during a 180-day period beginning on March 27, 2020. Due dates for repayment of loans outstanding on March 27 are extended by one year.

Waiver of Required Minimum Distributions

Required distributions of certain retirement plans (defined contribution plans like 401k and IRA) are waived for calendar year 2020. This applied to those who have been taking required minimum distributions and those who turned 70 ½ during 2019 but delayed the first distribution to April 2020.

If a required minimum distribution was taken during 2020, it is now not considered a distribution and can be rolled over within 60 days of taking the distribution.

Charitable Contribution Deductions

Up to $300 in charitable contributions may be deducted by taxpayers who do not itemize. This is actually a permanent tax law change embedded in the CARES Act and applies for every year from 2019 onward.

For taxpayers who do itemize, the deduction limitation for contributions is increased to 100% of AGI at the election of the taxpayer. This provision is limited to contributions made in 2020. Both non-itemizing and itemizing taxpayers have some limitations on how and to whom contributions can be made.

Student Loan Relief

All federal student loan payments are suspended for 6 months starting March 27, 2020. There is no penalty for this suspension. Student borrowers should check to see if their loan is federally owned, as the provision does not apply to strictly private loans.

Additionally, an employer may cover the cost of student loan repayments made between March 27, 2020 and January 1, 2021 up to the $5,250 limit for educational expense payments.

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