Key Tax Provisions for Individuals in the CARES Act by Christopher Taarick, JD, LLM
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) is the federal government’s third round of economic support for individuals and businesses in the wake of the COVID-19 health and economic crisis. Following are some of the tax-relief provisions the legislation provides to individuals. It is important to recognize that the IRS may not have issued final guidance on how it will apply and implement these measures for the benefit of taxpayers.
Expanded Unemployment Benefits to More Individuals
Although unemployment benefits are handled on the state level, the new stimulus law calls for unemployment aid to increase by $600 a week for up to four months and extend coverage to include individuals who are unable to go to work because they or a person in their household is diagnosed with COVID-19 and/or subject to a quarantine order. In addition, many states have extended unemployment assistance to part-time workers, self-employed workers and independent contractors who typically are not entitled to such benefits.
Under the CARES Act, the federal government will pay eligible taxpayers recovery rebates of up to $1,200 for single filers, $2,400 for married couples filing joint tax returns, and an additional $500 for each qualifying child who lives with the taxpayer. The maximum cash payments are available to taxpayers with adjusted gross income (AGI) of $75,000 or less for individuals or $150,000 of less for married couples filing jointly. Reduced payments will be available for taxpayers whose AGI is less than $99,000 for individuals or $198,000 for married couples filing jointly.
Relaxed Retirement Plan Distribution, Loan Rules
To help individuals improve liquidity in the near term, the CARES Act allows qualifying individuals to withdraw up to $100,000 in 2020 from 401(k)s, 403(a)s and 403(b)s, and individual retirement accounts (IRAs) without incurring the 10 percent early-withdrawal penalty. Distributions may be treated as gross income ratably over a three-year period. Any amount repaid will be treated as a rollover and be excluded from gross income.
The law also provides certain retirement savers with the option to take out loans of up to $100,000 or 100 percent of their vested account balance from their qualified contribution plans and repay the borrowed amount within five years.
Individuals qualifying for this retirement plan relief include those (1) who are diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) 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 owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
Temporary Waivers of Required Minimum Distributions (RMDs)
Individuals who turned at least 70½ in 2019 may temporarily suspend required minimum distributions (RMDs) from tax-qualified defined-contribution plans in 2020. In addition, most non-spouse IRA beneficiaries who, under recent law, must empty those inherited accounts within 10 years of an original owner’s death, may exclude 2020 from their 10-year calculation.
Expanded Tax Benefits for Charitable Contributions
Taxpayers who itemize deductions may deduct 100 percent of the charitable contributions they make in 2020 against their adjusted gross income. These provisions are limited to gifts of cash to public charities; contributions to private foundations, donor-advised funds, and supporting organizations do not qualify.
Taxpayers who claim the standard deduction and generally do not qualify to write-off charitable contributions may receive an above-the-line deduction of up to $300 for donations they make to non-profit organizations in 2020.
Carrybacks of Net Operating Losses (NOL)
Taxpayers who incurred NOLs in a tax year beginning after Dec. 31, 2017, and before January 1, 2021, may now carryback those losses to each of the five tax years preceding the year of the loss. In addition, the CARES Act retroactively suspends the 80 percent limitation for losses carried to 2019 and 2020, allowing NOLs to offset 100 percent of taxable income.
Removes Limitation on Business Losses for Non-Corporate Taxpayers
The CARES Act changes the current tax law by suspending the $250,000 limit on pass-through business losses that non-corporate taxpayers could use to offset non-businesses income for tax years 2018 through 2020. Applicable taxpayers may amend their previously filed tax returns to claim the additional loss and receive a refund. For purposes of calculating excess business losses, the CARES Act provides for the following:
- Excess business losses are treated as NOLs for subsequent tax years, eligible for carryforward or carryback;
- Capital gains are included in the computation of excess business losses only to the lesser of gains and losses attributable to a trade or business or net capital gain income of the taxpayer;
- Excess business losses are determined without regard to any capital losses or any deductions, gross income, or gains attributable to any trade or business of performing services as an employee; and
- Net operating loss deductions and qualified business income (QBI) deductions under section 199A are not taken into account in determining excess business losses.
Changes to the Limitation on Business Interest
The CARES Act temporarily increases the amount of interest expense that businesses may deduct on their tax returns from 30 percent to 50 percent of adjusted taxable income for any tax year beginning in 2019 or 2020.
For partnerships, the 50 percent limitation only applies in 2020; however, partnerships may elect to use 2019 adjusted taxable income in lieu of 2020 adjusted taxable income when applying the 50 percent interest expense limitation for 2020. In addition, unless partners elect out, those who were allocated excess business interest that could not be deducted by the partnership in 2019 are permitted to deduct 50 percent of excess business interest in 2020. The remaining 50 percent of excess business interest in 2019 would be subject to the 2019 limitation of 30 percent.
About the Author: Christopher Taarick, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he helps private companies and high-net-worth families develop tax-efficient business and estate plans. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.