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Individual Tax Relief Measures Addressing the Coronavirus

By Michelle Puma

During these challenging and unprecedented times, your highest priority is certainly the health of yourself and your loved ones.
However, to assist taxpayers with the economic pains caused by COVID-19 (commonly referred to as Coronavirus), the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27th. This Act contains a massive amount of relief and with it, a complexity that may be difficult to unravel. We have included the most salient points for each aspect of the law and separated them into categories (business and individuals) to assist with categorization. Please note there is some overlap of these provisions, therefore you might want to read each section below to determine what might apply to you. The provisions of the Act will apply to our clients to varying degrees; however, we have summarized the key components below.

Individual tax provisions

Individual recovery rebate/credit

Eligible individuals are allowed an income tax credit for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return) plus (2) $500 for each qualifying child of the taxpayer. This credit is refundable.

For purposes of the child tax credit, the term “qualifying child” means a qualifying child of the taxpayer, as de-fined for purposes of the dependency exemption, who hasn’t attained age 17. Children who are (or can be) claimed as dependents by their parents are not eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.

An individual who was not an eligible individual for 2019 may become one for 2020, e.g., where the individual was a dependent for 2019 but not for 2020. IRS will not send an advance rebate to such an individual, because advance rebates are generally based on information on the 2019 return. However, the individual will be able to claim the credit when filing their 2020 individual income tax return.

Phaseout of credit. The amount of the credit is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers. Under these rules, the credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500.

Coronavirus-related retirement plan distributions

The 10% early withdrawal penalty does not apply to any coronavirus-related distribution, up to $100,000, made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan made to a qualified individual.

A qualified individual is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours re-duced due to such virus or disease, being unable to work due to lack of child care 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, or other factors as determined by the Secretary of the Treasury.

In addition, the income from coronavirus-related distributions can be included in income ratably over three years unless the taxpayer elects to pick up the full distribution in the year the distribution is received. Also, the dis-tributions can be contributed back to the retirement plan at any time during the 3-year period beginning on the day after the date such distribution was received.

The CARES Act also provides flexibility for loans from certain retirement plans for coronavirus-related relief.

RMD requirement waived for 2020

RMD (Required Minimum Distributions) requirements from most qualified retirement plans do not apply for calendar year 2020, including those which would be required to be made for the first time in calendar year 2020, and such distribution not having been made before January 1, 2020. (Does not apply to defined benefit plans.)

$300 above-the-line charitable deduction

The CARES Act adds a deduction for tax years beginning in 2020, the CARES Act allows for a deduction for the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the tax year. This applies for any individual who elects not to itemize deductions.

Modification of limitations on individual cash charitable contributions during 2020

For the calendar year 2020, individuals are allowed a deduction for cash contributions to certain charitable or-ganizations (such as churches, educational organizations, hospitals, and medical research organizations) up to 100% (prior law was 60%) of their contribution base (generally, adjusted gross income). Any excess is carried forward and is treated as a deductible charitable contribution in each of the five succeeding tax years.

However, contributions to a Code Sec. 509(a)(3) supporting organization or a donor advised fund are not qual-ified contributions.

Modification of limitations on corporate cash charitable contributions during 2020

For tax years beginning after December 31, 2019, a corporation’s qualified contributions are allowed to the extent that the aggregate of those contributions does not exceed 25% of the corporation’s taxable income. Any excess is carried over and deducted for each of the five succeeding years in order of time, subject to the limitations.

Increase in limits on contributions of food inventory

For tax years beginning after December 31,2019, donations of food inventory to charitable organizations that use the food for the care of the ill, the needy, or infants, can be made to the extent that the deduction does not exceed, in the case of a C corporation, 15% of the corporation’s income, and, in the case of a taxpayer other than a C corporation, the deduction cannot exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer’s charitable deductions for the year.

Tax-excluded education payments by an employer temporarily include student loan repayments

An employee may exclude from gross income up to $5,250 per year of employer payments made under an ed-ucational assistance program for the employee’s education (but not the education of spouses or dependents), which will include eligible student loan repayments made before January 2, 2021.

Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principal or interest on any qualified higher education loan for the education of the employee (but not of a spouse or dependent).

As previously mentioned, the information above are the key individual tax provisions of the 880-page CARES Act. As always, we are dedicated to our client’s well being, especially during these difficult and unprecedented times. Please do not hesitate to reach out to us if you would like any additional information as it relates to you or your business.

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