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Tax Changes in the CARES Act Affecting Individuals

By Ronald Hegt .

The CARES Act, signed by President Trump on March 27, 2020, was designed, through various programs, to inject a $2.2 trillion stimulus into the U.S. economy. While much of the attention is focused on the small business forgivable loan program known as the Paycheck Protection Program, several changes in the Act could either directly or indirectly impact your individual tax returns.

The provisions directly affecting personal returns include:

  • Recovery rebates for individuals. Individual taxpayers can receive up to $1,200 in rebates and married couples filing jointly can receive up to $2,400. Taxpayers will receive an additional $500 payment for each child under age 17 who is eligible for the Child Credit. The rebates will be computed based on 2019 tax returns (or 2018 returns if 2019 not yet filed) and phased out based on Adjusted Gross Income (AGI), with a final limit of $99,000 for individual taxpayers and a joint income limit of $198,000 for married couples. The IRS is setting up a portal to allow non-filers to file and to set up direct deposit to receive rebates electronically. If a rebate is not received, the IRS will apply the amount due to the taxpayer as a credit against their 2020 taxes.

  • Waiver of early distribution penalties and recontributing. If an individual, or their spouse or dependent, is diagnosed with Coronavirus through a CDC-approved test, or is economically harmed by it as the result of a quarantine, business closure, layoff, or reduced hours, the individual can withdraw up to $100,000 from their IRA, pension plan, or 401(k) plan, in 2020, without incurring the 10% early distribution penalty. The income attributable to these withdrawals will be evenly taxed over a three-year period. These withdrawals can be re-contributed to a qualified retirement plan at any time during the three-year period, beginning on the day after the date the distribution was received, in order to eliminate the otherwise reportable taxable income.

  • Required minimum distributions. Any minimum distributions that were required to be paid in 2020 are waived, including those that would have required payment by April 1, if an individual turned 70 ½ in 2019. If the required minimum distribution for 2020 was already paid, you can re-contribute it to a qualified plan, provided you do so within 60 days of the receipt of the original distribution.
  • Charitable deduction rules. An individual who claims a standard deduction can now take an above-the-line deduction for up to $300 of cash contributions to public charities. In addition, for taxpayers who itemize deductions, the normal 60% of AGI limitation on charitable contributions is waived for 2020, allowing individuals to elect to deduct 100% of their cash contributions to public charities.

  • Student loan payments. Employers can make tax-free student loan payments in 2020, as part of the overall $5,250 cap on tax-free educational assistance programs for employees.

In addition, several business provision changes may impact individuals or your flow-through entities including:

  • The ability to carryback any net operating losses arising in 2018 through 2020, for five years, can result in immediate refunds for the 2018 tax year – and the 2019 tax year after the 2019 return is filed. In addition, any net operating loss arising in 2018 to 2021 and carried forward can be used to offset 100% of taxable income, as opposed to the 80% limitation under current law.

  • The 2017 Tax Cuts and Jobs Act (TCJA) provision limiting the current deduction of net business losses to $500,000 per year (for joint returns) has been suspended for 2018 through 2020. This can result in immediate refunds for the 2018 tax year, and the 2019 tax year after filing the 2019 return.

  • The TCJA inadvertently changed the depreciation life of qualified improvement property from 15 years to 39 years. The law has been fixed for property placed in service after 2017, allowing for 100% bonus depreciation for eligible property.

  • The TCJA limited the business interest expense deduction for certain taxpayers to business interest income, plus 30% of the adjusted taxable interest from that business. The Act increases the limitation to 50% for 2019 and 2020, and taxpayers can elect to use the 2019 adjusted taxable income amount in 2020.

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