What individuals need to know about the new CARES Act

The third coronavirus relief package – the Coronavirus Aid, Relief and Economic Security Act (CARES Act) – has been passed by Congress and signed by President Trump. The CARES Act contains provisions designed to help both businesses and individuals. Click here to read about the provisions affecting businesses. Below is a look at those provisions aimed at individuals.

Expanded Unemployment Insurance

Under the CARES Act, Unemployment Insurance provisions now include an additional $600 per week payment to each recipient for up to four months and it extends UI benefits to self-employed workers.

The federal government will provide temporary full funding of the first week of regular unemployment for states with no waiting period and extend UI benefits for an additional 13 weeks through Dec. 31, 2020, after the state UI benefits end.

Individual rebate/credit

Under the CARES Act, eligible individuals are allowed a refundable 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. The credit is refundable.

The IRS will use the 2019 tax returns (or 2018 returns if the taxpayer has not filed for 2019) to determine the advanced rebate amount and reconcile the rebate based on 2020 income. This means that taxpayers who receive a smaller rebate than they are eligible for based on 2020 income will receive the difference after filing a 2020 tax return. Overpayments of rebates due to a higher income in 2020 will not be taken back.

The rebate is reduced (not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of:

  • $75,000 for single filers.
  • $112,500 for head of household
  • $150,000 for taxpayers filing jointly

No advance rebate will be made or allowed after Dec. 31, 2020.

Waives the 10% early withdrawal penalty

The CARES Act provides that the 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000, for an individual

  • 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);
  • Whose spouse or dependent is diagnosed with such virus or disease by such a test; or
  • Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced 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.

The withdrawn amounts are taxable over three years or the taxpayer can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.

Eligible retirement accounts include IRAs, 401(k) plans and other qualified trusts, certain deferred compensation plans, and qualified annuities.

The CARES Act also waives the required minimum distribution rules for certain retirement plans in calendar year 2020.

$300 above-the-line charitable deduction

The CARES Act creates a $300 partial above-the-line charitable contribution for filers taking the standard deduction. It also expands the limit on charitable contributions for those who itemize deductions.

Student Loans

Certain employer payments of students loans on behalf of employees are excluded from taxable income. Employers may contribute up to $5,250 annually toward student loans. The payments would be excluded from an employee’s income.

This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.