CARES Act: Tax tips and planning for your individual clients

Tax Law and News Accountant working remotely

We all know all about the postponed federal tax filing deadline of July 15, but what kind of planning can you help your individual clients with for tax year 2020? Four key areas came about as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act: economic impact payments, retirement plan relief options, charitable donation incentives and relief available for students.

Economic impact payments

Economic impact payments are available for certain taxpayers and can be calculated based on the latest filed tax return (either 2018 or 2019 if already filed). Single filers who fall on or under the limits in the table below will receive the full amount of $1,200, and married filing joint taxpayers will receive $2,400. Parents will receive an additional $500 for each qualifying child.

Filing status Payment reduced by 5% of AGI in excess of AGI level where payment is completely phased out (for taxpayers without qualifying children)
Single & married filing separately $75,000

$99,000

Head of household $112,500 $136,500
Married filing jointly $150,000 $198,000

 

This payment will be reconciled on the 2020 tax return to determine if a taxpayer received too little. For example, if the adjusted gross income for 2019 exceeds the phaseout threshold, but a lower adjusted income reported for 2020 results in an increased economic impact payment, the additional credit will be refunded or reduce taxes owed in spring 2021.

Non-filers can use an IRS tool to register for their payment. Taxpayers can check the status of their payment with the IRS “Get My Payment” tool, which the IRS announced enhancements to on April 26, 2020.

Tip: Your client may want to go ahead and file for 2019, especially if income decreased from 2018, to receive a potentially higher check.

Is this payment considered taxable income? What we know now is no; this will be a new refundable tax credit, similar to the earned income tax credit.

Retirement plan relief options

10% early withdrawal penalty suspended. There is relief available for taxpayers younger than age 59 ½ seeking to use early withdrawals from retirement plans to help fund adverse financial outcomes. Up to $100,000 from qualified retirement plans can be taken out any time during the 2020 calendar year due to coronavirus-related hardships, without being subject to the traditional 10% penalty. The CARES Act refers to this withdrawal as a “coronavirus-related distribution.”

The distribution must be made to an individual (or the spouse or dependent of an individual) diagnosed with the SARS-CoV-2 or COVID-19 by a CDC-approved test, or an individual who incurs financial difficulty from the virus as a result of any of the

  • Adhering to quarantine orders.
  • Being furloughed, laid off, or having work hours reduced due to such virus or disease.
  • Being unable to work due to lack of childcare due to such virus or disease.
  • Closing or reducing hours of a business owned or operated by the individual due to such virus or disease,
  • Other factors as determined by the U.S. Secretary of the Treasury.

Tip: If a positive virus test result cannot be obtained, encourage your clients to take extra care in substantiating eligibility for this CARES provision.

Tax treatment of coronavirus-related distributions. Any distributions considered coronavirus-related are subject to tax over a three-year period, beginning with taxable year 2020. Within three years of receiving the coronavirus-related distributions, taxpayers have the option to recontribute them into any retirement vehicle that would have been eligible to receive a 60-day rollover of the original distribution. The recontributed amounts are treated as a tax-free rollover: The distributions are not subject to tax and the recontributed amounts are not counted against the annual limits. There are no limitations set in place on how you can use the funds.

Tip: The One-Rollover-Per-Year Rule still applies, so a taxpayer who made a rollover within the last 12 months will need to carefully time the 2020 coronavirus distribution to remain eligible for the three-year rollover provision in the CARES Act.

Relief for those subject to required minimum distributions. Any required minimum distributions (RMDs) that were supposed to be taken in 2020 are now suspended for tax year 2020, including taxpayers who turned 70 ½ in 2019 but did not withdraw their first RMD by Dec. 31, 2019.

Tip: Your clients do not have to be adversely affected by the coronavirus to defer the distributions.

Charitable donation incentives

New above-the-line charitable deduction. There is good news for your philanthropist clients who do not typically get the benefit of deduction due to lower itemized deductions. For tax year 2020, up to $300 in qualified charitable contributions may be claimed in computing adjusted gross income (AGI). There is no mention that these contributions must have occurred after the CARES Act was signed; they simply apply to tax years beginning after Dec. 31, 2019.

Tip: Taxpayers who itemize deductions will not get the additional benefit of this $300 above-the-line deduction. All qualified charitable contributions made by itemizing individuals will continue to be reported on Schedule A of Form 1040.

Relaxation of the 60% AGI limit for cash contributions. The percentage limitation for cash charitable contributions made by individuals is temporarily increased under the CARES Act. So, if your itemizing client has ambitious charity goals, they can take a charitable deduction up to 100% of their 2020 AGI, subject to certain limitations.

A qualified contribution for purposes of the above-the-line deduction or the related AGI limitation is a charitable contribution made in cash during the 2020 calendar year to churches, non-profit educational institutions, non-profit medical institutions, public charities or any other organization described in Code Sec. 170(b)(1)(A), but excluding contributions to a donor-advised fund or Code Sec. 509(a)(3) supporting organization. Because these provisions only cover cash contributions, donations of stock, real estate or any other non-cash items are still available only by itemizing and are subject to the 60% of AGI limit. The deduction for contributions of appreciated long-term capital gain property is still subject to the 30% of AGI limitation regardless of the recipient.

Tip: Carryovers of contributions from a prior year that are treated as made in 2020 are not eligible. Only contributions actually made in calendar year 2020 will qualify.

Relief available for students

There are three components under the CARES Act:

  1. Federal student loan payments are suspended.
  2. The interest rate is temporarily set to 0% on federal student loans.
  3. Student in default are no longer subject to IRS garnishment.

You can read more about the grace period and actions to take for relief, such as refunds from recent payments already made.

Tip: For those financially sound, payments can still be made and will only be counted against the principal balance during this interest-free time period. Ultimately, continual payments will reduce the total amount of interest paid over the life of the loan.

Tax-free student loan benefits through an employer. Up to $5,250 of student loans may be repaid by an employer tax-free as part of a qualifying educational assistance program. In addition to student loan repayments, qualifying educational assistance includes, but is not limited to, direct payments of tuition, fees and similar payments; books; supplies; and equipment that are made by the employer for the employee’s education. Employer educational assistance in excess of $5,250 for the year will be subject to income and employment taxes. The provision allowing student loan payments to qualify applies to payments made after March 27, 2020, through the end of the year.

Tip: In order for the exclusion to apply, the loan must have been incurred by the employee for the education of the employee. For example, the loan cannot pay for the education of an employee’s child or spouse.

The time is right for planning

Hopefully, you gained some insights to share with your individual clients. Just because the tax filing deadline is delayed until July does not mean you can’t help your clients now with tax planning. I will leave you with a deep dive FAQ on the CARES Act that is full of great information from one of my favorite sources, The Tax Foundation.

 

Editor’s note: Visit the Intuit Accountant and Tax Professional COVID-19 Resource Center for information and tools to help you and your clients navigate these challenging times.

This article was originally published on April 21, 2020, and was republished with updates on April 26, 2020.

Comments (7) Leave your comment

  1. If legal permanent resident (LPR) with valid social security number has a spouse with only an ITIN number, and us citizen child, under 16, as I understand, none of them would receive the stimulus checks. What if LPR and child file a separate return for 2019? Would they be entitled to the 1.200 and 500 respectively, or the fact that spouse’s ITIN number has to show on their return prevent them to get it?

  2. I am interested to learn more on interest penalties under the CARE Act applicable to 2019 tax returns.

    Please confirm:

    I believe undepayment of 2019 estimated tax is still subjest to interest penalty.

    I understand that there is no late payment on balance due till after June 15, 2020

    Thank You – BL

    1. The relief is provided for income tax payments for the 2019 tax year, meaning underpayment interest stopped accruing on April 15, 2020, AND the 2020 tax year, for those federal estimated tax payments due April 15, 2020.

      Any interest, penalty, or addition to tax for failure to pay income taxes postponed by the IRS notice will begin to accrue once again on July 16, 2020.

      The IRS has stated there is no limitation on the amount of the payment that may be postponed to July 15, 2020.

  3. Have quick question about this!!
    This payment will be reconciled on the 2020 tax return to determine if a taxpayer received too little. For example, if the adjusted gross income for 2019 exceeds the phaseout threshold, but a lower adjusted income reported for 2020 results in an increased economic impact payment, the additional credit will be refunded or reduce taxes owed in spring 2021.

    What happens if higher adjusted income reported for 2020 would that results decrease impact payment, would that increase taxes owed in spring 2021

  4. I have filed my 2019 return. I did not owe and applied overpayment to 2020 tax. I tried filling out the Get my refund and because of the above – it wouldn’t let me finish my bank info said the form was not complete – try back tomorrow.

    If i didn’t owe or pay it seems like it’s not going to let me finish the form — Do you think they will eventually mail me a check???

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