COVID-19 Update: CARES Act Tax Implications for Individuals

Many may be wondering about some of the recent tax changes meant to help everyone coping with the economic fallout from the COIVD-19 pandemic. There are important tax-related provisions for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress’s unprecedented economic stimulus package that the President signed into law on March 27, 2020.

These provisions are in addition to the recent IRS pronouncements deferring filing and payment requirements for federal income returns from April 15, 2020 to July 15, 2020. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations, and other non-corporate tax filers, as well as those who pay self-employment tax. Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension by filing Form 4868 through their tax professional, tax software, or using the Free File link on IRS.gov.

The IRS has also extended the deadline for filing Gift and Generation Skipping Transfer (GST) Tax Returns from April 15, 2020 to July 15, 2020. The extension is automatic, and taxpayers do not have to file Form 8892 to get the filing and payment relief. However, to receive an extension of the Gift and GST Tax Return, Form 709, filing date to October 15, 2020, taxpayers must file Form 8892 by July 15, 2020.

In a joint statement from Governor Murphy, Senate President Sweeney, and Assembly Speaker Coughlin issued on April 1, 2020, it was announced that the New Jersey state income tax filing deadline and the corporation business tax filing deadline will be extended from April 15 to July 15, 2020. Additionally, the state fiscal year will be extended to September 30, 2020.

New York, by executive order, has announced similar automatic extensions for tax filings and payment.

Recovery rebates for individuals.

To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200.00 payments to eligible taxpayers and $2,400.00 for married couples filing joints returns. An additional $500.00 payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).

Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000.00 (singles or marrieds filing separately), $122,500.00 (head of household), and $150,000.00 (joint). There is no income floor or ‘‘phase-in’’ – all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.

The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.

Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.

Waiver of 10% early distribution penalty.

The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000.00, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules.

Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

Charitable deduction liberalizations.

The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

1. Individuals will be able to claim a $300.00 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
2. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
3. Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
4. For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

Exclusion for employer payments of student loans.

An employee currently may exclude $5,250.00 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.

Break for remote care services provided by high deductible health plans.

For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.

Break for nonprescription medical products.

For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements

For more information, please contact Judson M. Stein Esq., Partner and Chair of the Trusts, Estates & Wealth Management Practice at Genova Burns, via email or 973.533.0777.