In addition to the many provisions under the CARES Act of 2020 providing relief to businesses, both large and small, Congress sought to assist individuals who may be feeling the economic effects of COVID-19, including those who have lost their jobs as a result. Such relief comes at a price tag of approximately $600 billion of the $2 trillion total relief package. This article summarizes some of the major provisions designed to aid individuals.
The “typical” family of four will receive an economic stimulus check in the amount of $3,400. This amount consists of $1,200 for each adult in such a household, along with $500 for each qualifying dependent under the age of 17.
A family of four receiving this amount would need to have a combined adjusted gross income not exceeding $150,000. Families with income in excess of this amount will see the amount of their stimulus payments begin to reduce. Married couples filing joint tax returns will not receive stimulus payments if their combined adjusted gross income was in excess of $198,000. Likewise, single taxpayers will have their payments reduced if their adjusted gross income is over $75,000, and will not receive any payment if their adjusted gross income is over $99,000. Numerous websites now have calculator tools available to project the amount of a given taxpayer’s stimulus payment.
The amount of taxpayer’s adjusted gross income will be determined based on what was reported on the taxpayer’s 2019 Form 1040, or, if the taxpayer has not yet filed his or her 2019 1040, then the 2018 form will be used. The IRS has recently announced that Social Security recipients who are not otherwise required to file income tax returns will also receive stimulus payments, using the method by which they now receive their monthly social security payment.
If the IRS has information about a given taxpayer’s bank account, then the stimulus payments will be directly deposited. Otherwise, a paper check will be sent.
These payments are not considered taxable income because they are actually advance payments on a new, one-time refundable credit against individuals’ 2020 federal income taxes.
Payments may begin to arrive as early as the week of April 6, 2020. Due to the sheer volume of payments, however, there is some concern that many taxpayers will not receive their payments until August or September. The government’s ability to make these payments quickly is under scrutiny.
It is, as of this writing, unknown how long the current de facto economic shutdown in the United States will continue, but there are already discussions in Congress about having another round of economic stimulus payments being distributed to qualifying taxpayers. Some proposals involve having certain taxpayers repay all or some of the stimulus amounts to the government at a later time.
Student Loan Relief
There are two primary provisions aiding borrowers with federal student debt. First, the interest rate on such debt has been reduced to 0% until further notice. Second, mandatory student loan payments are suspended through September 30, 2020. The net effect of this is that former students who do not or cannot make student loan payments while dealing with the effects of COVID-19 will not have a higher balance when they begin making payments again.
Some members of Congress, notably Senator Chuck Schumer, have expressed a desire to forgive up to $10,000 for each borrower with student loan debt. This provision ultimately did not make it through the bill that President Trump signed into law on March 27, 2020, but this, or a similar provision, could conceivably make its way into a future bill for the President to sign.
Extra Unemployment Payments
The CARES Act temporarily increases weekly unemployment benefits by $600, for a maximum of up to four months (between April 5, 2020 and July 31, 2020), in addition to what such persons are receiving by way of state unemployment benefits.
The Pandemic Unemployment Assistance program expands unemployment coverage to certain workers who traditionally do not qualify for unemployment, such as the self-employed and independent contractors. The loss of work must be related to COVID-19 in some way, such as through the individual having been diagnosed or caring for a family member with COVID-19.
The CARES Act offers numerous other provisions that are meant to assist taxpayers, both in terms of their compliance and also substantive changes that would impact their tax liability.
Waiver of 10% early distribution penalty from retirement plans. Taxpayers under the age of 59 ½ normally must pay a 10% penalty for withdrawing funds from retirement accounts such as IRAs without a qualifying reason. In 2020, a taxpayer under the age of 59 ½ may withdraw up to $100,000 from a retirement account and not incur a 10% early withdrawal penalty, although the funds withdrawn will still be subject to income tax unless the retirement account is a Roth plan. The theory behind this provision is that many taxpayers, such as those who are losing their jobs, will be experiencing significant economic hardship, and this will enable taxpayers to pay their ongoing expenses more easily. Some practitioners, however, are concerned that this will further exacerbate Americans’ looming retirement crisis, in which many taxpayers have saved insufficient amounts to retire at all, much less comfortably.
No required minimum distributions from retirement plans in 2020. Some taxpayers, on the other hand, may not wish to make withdrawals from their retirement accounts even though they would otherwise be required to. Taxpayers generally must start taking withdrawals from their retirement accounts, to commence no later than the April 1 following the calendar year in which they reach the age of 72. This general rule does not apply during 2020, and taxpayers may defer withdrawals until 2021.
$300 “above the line” charitable deduction. Normally, a taxpayer must itemize deductions using Schedule A of Form 1040 to take advantage of the charitable deduction. For 2020 only, taxpayers will be able to take a charitable deduction of up to $300 even if they do not itemize deductions.
July 15 tax day. The deadline to file Form 1040, the individual federal income tax return, has been postponed until July 15, 2020 for this year only. This is both an extension of time to file and an extension of time to pay. A taxpayer who files an extension in April normally must include with the extension the payment that would have been due had the return been filed in April.
The IRS announced at first that the late filing deadline applied only to individual income tax returns. It has since announced similar relief for other returns, including gift tax returns (Form 109) and fiduciary income tax returns (Form 1041). However, you should check the deadline for any return you need to file this year, as the IRS has announced frequent changes in due dates since the pandemic started.
People First Initiative. IR-2020-59, released by the IRS on March 25, 2020, provides procedural relief for taxpayers in a number of ways, with each of the following relief provisions applying through July 15, 2020.
- Taxpayers with existing installment agreements need not make payments.
- Taxpayers with pending Offer in Compromise applications will have until July 15, 2020 to provide additional required information. Taxpayers can also defer payments on Offers in Compromise.
- Liens and levies initiated by IRS field officers are suspended, as are automatic systemic liens and levies.
- The IRS will suspend Passport Certifications to the Department of State for “seriously delinquent” taxpayers.
- In-person meetings with IRS examiners are suspended.
- In a negative development, contact with the IRS is more difficult to initiate. After initial guidance stating that the Practitioner Priority Line would remain open, it is now unavailable to tax practitioners.
Rees Broome’s Summary
Many of the provisions described above will provide much-needed relief to taxpayers experiencing the health or economic effects of COVID-19. There are some questions about whether some relief goes far enough to assist eligible taxpayers, as well as whether additional relief is forthcoming. If you believe that any of the foregoing provisions may assist you, take care to make sure that your actions fall within the scope of the relief provided by the CARES Act and other relief provisions.