March 31, 2020
CARES Act – individuals (detailed)
Recovery Rebates for Individuals:
One the most talked about provisions of the CARES Act is the Recovery Rebates for Individuals. The Act creates a refundable tax credit (called the Recovery Rebate) for eligible taxpayers against income on your 2020 tax return. The refundable credit will be paid in the coming weeks, and eligibility will be initially determined based on the taxpayer’s 2019 or 2018 tax return.
The Act defines eligible individuals as “any individual other than a nonresident alien individual, an individual claimed as a dependent on another taxpayer’s return, or an estate or trust.” The amount of the Recovery Rebate is up to $1,200 for single filers, $2,400 for joint filers, and up to $500 for each qualified child. Among other things, a qualified child must be under the age of 17 and claimed as a dependent on the taxpayer’s return.
The amount of the Recovery Rebate will be reduced, and ultimately phased out, once a taxpayer’s adjusted gross income (AGI) reaches certain threshold amounts.
- Married filing jointly – the credit gets reduced once AGI exceeds $150,000 and phases out completely when AGI exceeds $198,000.
- Head-of-household – the credit gets reduced once AGI exceeds $112,500 and phases out completely when AGI exceeds $146,500.
- Single filers – the credit gets reduced once AGI exceeds $75,000 and phases out completely when AGI exceeds $99,000.
For example, a married couple filing a joint return that had an AGI of $140,000 and two qualifying children on their 2019 tax return, would be eligible for a Recovery Rebate of $3,400. However, if that same couple had a 2019 AGI of $180,000, then their credit would be reduced by $1,500, and they would receive a Recovery Rebate of $1,900.
A taxpayer who receives a reduced credit, or is phased out completely, based on their 2019 tax return, but whose income in 2020 is below the AGI threshold will get this lost amount back when they file their 2020 tax return. Assume the couple from the above example whose AGI in 2019 was $180,000, then reports income of $140,000 in 2020. In this situation the couple would receive a refundable credit of $1,500 on their 2020 tax return.
The Act does not “claw back” rebates received by a taxpayer who is eligible based on their 2019 AGI, and then subsequently reports income above the AGI threshold on their 2020 return. It does appear that a taxpayer would be required to repay any rebate received based on their 2018 AGI, if their income in 2019 made them ineligible for the credit.
Suspension of Required Minimum Distributions (RMDs):
Another notable provision of the CARES Act is the suspension of Required Minimum Distributions (RMDs) for 2020. This applies to both account owners and beneficiaries of Traditional IRAs (including SEP and SIMPLE accounts), 401(k), 403(b), and 457(b) accounts. For those people who turned 70 ½ in 2019 but did not take their first RMD in 2019, they will not have to take the 2019 or the 2020 distribution. People who have already taken RMDs in 2020 may be able to return the distribution back to their account. Prior to the SECURE Act, certain beneficiaries of retirement accounts were required to withdraw the entire account balance by the end of the 5th year after the original account owner died. The CARES Act allows these beneficiaries to not count 2020 as one of these 5 years.
Penalty Free Access to Retirement Plan Funds:
For those impacted by the Coronavirus, the Act permits distributions from IRAs and employer-sponsored retirement plans of up to $100,000, to qualify as “Coronavirus-Related Distributions.” If a distribution is a Coronavirus-Related Distribution, then a number of potential benefits apply including:
- Exemption from the 10% penalty for people under 59 ½.
- The distribution is still considered taxable income but is split evenly over the next 3 years. A taxpayer may elect to include all of the income from the distribution on their 2020 return.
- The distribution is eligible to be put back into a retirement account within 3 years of the date of the distribution. This can be done as a lump sum rollover, or as multiple partial rollovers.
- Exemption from mandatory Federal withholding of 20% on distributions from employer-sponsored retirement plans.
- Increasing the amount an individual may borrow from their employer-sponsored retirement plan to $100,000, or 100% of their vested balance. Payments on loans taken in 2020 may be delayed for up to one year.
To be considered a Coronavirus-Related Distribution a person must either have been diagnosed with COVID-19, have a spouse or dependent who has been diagnosed, or who has suffered some type of financial hardship because of the virus.