Individual Relief Provisions
Recovery Rebate Credit: The Recovery Rebate Credit is a credit that applies to the 2020 income tax return. The IRS will make advanced payments of this credit based on tax information provided on individual’s filed 2019 or 2018 income tax returns. The maximum tax credit available is $1,200 for each eligible individual, plus $500 for each qualifying child (under the age of 17). So, for a married couple with 3 qualifying children the credit would be $3,900 ($2,400 for (2) eligible individuals and $1,500 for (3) qualifying children).
The maximum credit begins to phase out by 5% of the amount the taxpayer’s Adjusted Gross Income (AGI) exceeds:
- Married Filing Jointly: $150,000 – Completely phased out at $198,000
- Head of Household: $112,500 – Completely phased out at $136,500
- All other taxpayers: $75,000 – Completely phased out at $99,000
For the Recovery Rebate Credit, an eligible individual is an individual that has filed a federal income tax return for either 2018 or 2019 and cannot be claimed as a dependent by someone else. Additionally, an eligible individual also includes an individual that did not file a tax return in 2018 or 2019 but did receive either a Form SSA-1099 for Social Security benefits or Form RRB-1099 for Railroad Retirement. Qualifying children for the Recovery Rebate Credit are defined as dependent children under 17 years old. Dependents over 17, including children in college do not qualify for the credit.
Recovery credits are expected to be processed as quickly as possible. The first payments are expected the week of April 6th. The advance credits will be direct deposited into bank accounts provided to the IRS through 2018 or 2019 income tax refunds. For those who do not have bank information on file with the IRS, checks will be mailed out. For individuals not eligible for advanced payment of the recovery credit, they can claim the Recovery Rebate Credit when they file their 2020 tax return.
Retirement Plan Changes: Under the CARES Act, distributions under $100,000 from eligible retirement plans to pay for expenses related specifically to COVID-19 will not be subject to the 10% early distribution penalty. Eligible retirement plans include Individual Retirement Plans (IRA), 401(k), 403(a), 403(b) and 457(b) plans.
To qualify for the coronavirus distribution penalty exemption, distributions must be made after March 27, 2020 and before December 31, 2020 and must be made to an individual who meets at least one of the following criteria:
- An individual that was diagnosed with SARS-CoV-2 or COVID-19 by a Center for Disease Control (CDC) approved test.
- An individual who’s spouse or dependent was diagnosed with SARS-CoV-2 or COVID-19.
- An individual who experiences adverse financial consequences due to the coronavirus. This would include the cost of being laid off or furloughed, being unable to work because of a lack of childcare, closing or reducing hours of a business or other similar factor(s).
Distributions will be subject to income taxes for retirement distributions, but will be exempted from the 10% penalty (as mentioned above). Additionally, under the CARES Act, an individual that received a coronavirus distribution may repay the distribution within 3 years of the initial receipt and have the distribution treated as a qualified rollover. The repayments may be a single contribution or an aggregation of contributions.
Retirement Plan Loans: Loan limits for employer sponsored retirement plans for coronavirus affected individuals increased to the lesser of $100,000 or 100% of the plan value (but not less than $10,000). Also, affected individuals with loan repayments due will have a one-year deferral of the repayment.
Required Minimum Distributions: For the calendar year 2020 the required minimum distributions (RMD) are suspended for all taxpayers.
Charitable Contributions: The CARES Act added a $300 deduction to Adjusted Gross Income (AGI) for charitable contributions. Additionally, charitable contribution limits are suspended for most contributions, however, contributions in the current year are limited to 100% of Adjusted Gross Income (AGI). Any contributions in excess of 100% of AGI will be carried forward for a maximum of 5 years.
Employer Paid Student Loans: Student loan payments made by an employer paid before January 1, 2021 can be excluded from the employee’s taxable income up to $5,250. Any payments in excess of $5,250 would still be subject to income and employment taxes.
For more information and help navigating the CARES Act provisions please contact the professionals at Cook Martin Poulson at 801-467-4450 for the Salt Lake City office or for the 435-750-5566 Logan office of by visiting our website at www.cookmartin.com.