With the Covid-19 pandemic having its impact on the economy and the tax filing season, Congress, the President, the IRS, and the Treasury Department have taken actions to provide relief through legislation. The largest source of legislation passed by Congress and signed into law was the Coronavirus Aid, Relief, and Economic Relief (CARES) Act. In this email, we wanted to take the time to go through the main aspects of this legislation that will impact taxpayers and businesses most going into the 2020 tax reporting season. All taxpayers should review this to see how the law may impact them heading into 2020.
Eligible individuals are entitled to the Recovery Rebate Credit for their first tax year beginning in 2020. However, the government made advanced payments of the credit in the form of Economic Impact Payments with eligibility and credit amounts based on information from 2018 or 2019. The credit was fully refundable, but phased out for higher-income taxpayers. The maximum credit was $1,200 for each eligible individual plus $500 for each qualifying child. The maximum credit amount was reduced by five percent of the taxpayer’s adjusted gross income (AGI) that exceeded $150,000 for joint filers, $112,500 for head of household, and $75,000 for any other taxpayer. If a taxpayer has not yet received a stimulus check can still receive it if they qualify on their 2020 tax return.
The CARES Act allows taxpayers to access their retirement benefit funds by waiving the 10 percent additional tax on early distributions for any qualified coronavirus related distributions from a retirement plan. Individuals that take these distributions can include them in gross income over a three-year span and have three years to repay the amount as long as total distributions related to the coronavirus do not exceed $100,000. To qualify as a coronavirus distribution, the distribution must be from an eligible retirement plan and made between the enactment of the CARES Act and December 31, 2020. In addition, it must:
- Be made to an individual who is diagnosed with the virus SARS-CoV-2 or the coronavirus disease 2019 (Covid-19) by a test approved by the Centers for Disease Control and Prevention,
- 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 coronavirus.
For the 2020 calendar year, the required minimum distributions (RMD) requirements generally applicable to retirement plans are suspended for defined contribution retirement plans, including IRAs. Because of this, plan participants and beneficiaries will not be required to make RMDs for the year by law.
The Act also made changes related to charitable deductions. First, the percentage limitation on the charitable deduction contribution base for individuals is suspended for 2020. Second, for tax years beginning after 2019, an eligible individual may claim an above-the-line deduction in computing adjusted gross income of up to $300 for any qualified charitable contribution.
Payments made by an employer to either an employee or lender to be applied toward an employee’s student loans can be excluded from the employee’s income if made before January 1, 2021. These payments can be made towards principal or interest for any qualified education loan. An employer may pay up to $5,250 each tax year toward an employee’s student loans, and that amount would be excludable from the employee’s income, with any excess being subject to income and employment taxes.
The CARES Act granted eligible employers a credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts. The employee retention credit is available to be claimed on a quarterly basis, but the amount of wages and health benefits is limited to $10,000 in aggregate per employee for all quarters. Qualifying employers can be immediately reimbursed for the credit by reducing the required deposits of payroll taxes that would have been withheld from employees’ wages by the amount of the credit.
The Act also deferred the payments of payroll taxes, including self-employment taxes. Payroll taxes due from March 27, 2020 to December 31, 2020 are deferred. The deferral applies to the employer portion of the 6.2-percent OASDI portion of payroll taxes, as well as 50 percent of the equivalent self-employment tax. Half of the deferred taxes are due on December 31, 2021, and the other half are due December 31, 2022. Additionally, President Trump issued a memorandum on August 8, 2020, directing the Treasury Secretary to use his disaster relief authority to defer the withholding, deposit and payment of the employee portion of the 6.2 percent OASDI tax on wages paid during the period of September 1, 2020 through December 31, 2020. For affected employers that choose to defer, the due date for withholding and paying the deferred tax until the period beginning January 1, 2021, and ending April 30, 2021.
For Net Operating Losses (NOLs), any NOL coming from a tax year beginning after December 31, 2017, and before January 1, 2021, may be carried back five years unless the carryback period is waived. For NOLs that arose in tax years 2018 or 2019, the time to make the waiver election is extended to the due date for filing the taxpayer’s return for the first tax year ending after March 27, 2020. Normally, the election is required by the due date (including extensions) of the return for the year in which the NOL arises. The rule limiting an NOL deduction that arises in a tax year beginning after December 31, 2017, to 80 percent of taxable income in a carryback or carryforward is suspended until the 2021 tax year.
With the extent of the legislative changes based on Covid-19 relief being a vast as it was, this email is a brief overview of some of the changes to note going into the 2020 tax reporting season. As 2020 comes to close, we would like to encourage you to contact us with any questions or concerns you might have regarding the new year’s reporting season.
Please contact Mark Levine with questions you may have or to discuss your year-end planning needs.