What the CARES Act Means for You
The CARES Act was enacted into law on March 27th, 2020. This article contains information on the following topics:
New tax filing deadlines (Federal and states)
Recovery Rebate Credit – Who is eligible?
Charitable contribution deduction changes for 2020
Waiver of penalty for early withdrawal and Elimination of Required Minimum Distributions
Postponement of Tax Return Filing Date and Income Tax Payments Due
Due to the ongoing Coronavirus related emergency, the IRS and Treasury Department have postponed the income tax filing deadline for individuals. The 2019 Form 1040 and other federal income tax returns that were initially due April 15, 2020 have now been postponed; the tax filing and tax payment deadline is now July 15, 2020. Individuals do not have to file an extension in order to obtain an automatic 3 month extension of their tax return and any tax payment due. There is no limitation on the amount of tax that may be postponed. This postponement also applies to estimated tax payments that may have been due on April 15, 2020 for calendar year 2020. The extension to July 15 also applies to contributions to an Individual Retirement Accounts and Health Savings Accounts applicable to the 2019 tax year.
If individuals need additional time, past July 15, 2020 to file their 2019 tax return, a request for an automatic extension (Form 4868) can be made on or before July 15, 2020. The extension will allow individuals to extend the time of filing their 2019 tax return to October 15, 2020. However, in order to avoid interest and penalties, individuals must pay any taxes due along with this extension requests on or before July 15, 2020. States have also decided to delay the requirement to file and pay tax. In the D.C. Metropolitan area for example,
• The District of Colombia has decided to extend the 2019 tax filing date and the tax payment date to July 15, 2020. However, the first quarter 2020 estimated payments are still due April 15, 2020.
• In Maryland, 2019 income tax returns, the 1st quarter 2020 estimated tax payments and 2019 tax payment dates are all postponed until July 15, 2020.
• For Virginia, 2019 income tax returns, tax payments and 1st quarter 2020 estimated payments are extended until June 1, but interest accrues beginning May 1. Therefore, you may want to file your Virginia tax return by May 1, 2020.
Recovery Rebate Credit
Single individuals with an adjusted gross income up to $75,000 are eligible for a $1,200 rebate. Married couples filing jointly with an adjusted gross income of up to $150,000 are eligible for a full $2,400 rebate. Recovery Rebate Credits for 2020 will be advanced to eligible individuals as cash payments in 2020. These advanced refunds will be made based on 2019 or 2018 tax return information. The rebate amount is completely phased-out for single filers with incomes exceeding $99,000 and for married taxpayers filing jointly at $198,000. In addition, taxpayers are eligible for an additional $500 per qualifying child (generally children under age 17), provided the qualifying child has a social security number.
The IRS will use a taxpayer’s 2019 (if filed) or 2018 tax return to determine the amount of the rebate. The rebate will not be considered taxable income.
On March 30, the Treasury Department and the Internal Revenue Service announced that distribution of these rebate payments will begin in the next three weeks and will be distributed automatically, with no action required for most people.
The rebate is not available to any individual who is a nonresident alien, nor to any individual who can be claimed as a dependent on another’s return. It is important to note that in order to qualify for the rebate, individuals and their children must have U.S. social security numbers. However, the law denies the rebate to any individual with a social security number if they have filed a joint return with a spouse who has an Individual Taxpayer Identification Number (ITIN), or filed a return with a qualifying child who has an ITIN. ITINs are typically issued to foreign nationals who are not authorized to work in the United States.
Charitable Contribution Changes for 2020
For tax year 2020, all taxpayers may deduct up to $300 for cash contributions to most charitable organizations, even if they don’t itemize deductions. Additionally, for 2020 the adjusted gross income limitation on the deduction of cash contributions to most charitable organizations by individuals has increased to 100% of adjusted gross income.
Waiver of Early Withdrawal Penalty and Elimination of Required Minimum Distributions for 2020
The 10% penalty for early withdrawal from a qualified retirement account (including Individual Retirement Accounts – “IRAs”) is waived for coronavirus related distributions up to $100,000. The distribution may be subject to tax over a three year period, but the taxpayer has the option to repay the amount to the retirement plan within three years and not be subject to tax on the distribution.
It is important to note that distributions are coronavirus related if made to an individual:
Who is diagnosed with the COVID-19 virus with a test approved by the Center for Disease Control (CDC),
Whose spouse or dependent is diagnosed with COVID-19, or
Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid, off having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business because of COVID-19, or other factors determined by the Secretary of the Treasury.
The Treasury Department has yet to release guidelines on the documentation that will be required under these rules. However, pension plan administrators may rely upon self-certifications from an employee that the employee met at least one of the conditions. This provision applies to distributions made on or after January 1, 2020.
Individuals are usually required to take Required Minimum Distributions (RMD) from their individual retirement accounts and certain other qualified pension plans starting at age 72. However, the law provides that these minimum distributions are now not required during 2020.