The largest federal stimulus bill in U.S. history, the Coronavirus Aid, Relief and Economic Security (CARES) Act, was signed into law on March 27, triggering $2.2 trillion in spending and relief measures for businesses and families grappling with the impact of coronavirus on their livelihoods and bottom lines. In this post, we’ll look at the provisions targeted for individuals and families and help taxpayers know what to expect.
Recovery Rebate (a.k.a. Individual Stimulus Payments)
These rebates account for $290 billion of the total spending package. Payments in the amount of $1,200 (single) or $2,400 (married filing jointly) will be distributed to eligible Americans, plus $500 for each child under the age of 17. Individuals age 18 and older will not receive a payment if they are claimed as a dependent by another taxpayer.
Exact timing of these one-time payments remains unclear at the time of this writing, but likely during April or May. The payments will be electronic if the IRS has direct deposit information on file from a tax return.
Payments phase out at certain income thresholds at a rate of $5 of credit for every $100. For single taxpayers, the phase out starts at adjusted gross income (AGI) above $75,000. For married joint filers, it starts at $150,000 AGI, and Head of Household at $112,500. For example, married joint filers would fully phase-out at $198,000. If they had two children, the full phase-out would be $218,000. Use this calculator to predict your rebate amount.
These one-time payments are an advance payment of a credit that will be recomputed on the 2020 Form 1040. If the recomputed credit is higher based on changes in income or qualifying children, the taxpayer will get additional credit on the 2020 Form 1040. If it is lower, repayment of the excess amount is not expected, but we await official confirmation or further guidance from the IRS.
As a planning note, if you have not filed your 2019 tax return and you expect your 2019 AGI to be higher, you may want to delay filing until you receive your stimulus payment. Taxpayers who have not filed 2019 tax returns will receive payments based off of their 2018 AGI.
Use of Retirement Funds for Coronavirus Costs
The CARES Act permits individuals under the age of 59 ½ to withdraw up to $100,000 from retirement funds during 2020 for coronavirus costs without triggering the usual 10% early withdrawal penalty under Section 72(t). A coronavirus-related distribution will be penalty-free if it is made to:
- An individual who is diagnosed with SRS-COV-2 or COVID-19 by a CDC-approved test
- An individual whose spouse or dependent is diagnosed with one of the two diseases
- Individuals who experience adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care
There will be income tax on any coronavirus-related withdrawals, but it can be spread over three years starting in 2020. If you repay the withdrawal to the account within three years, you can avoid the income tax. The loan limit from retirement plans doubles from $50,000 to $100,000 for the 180 days after CARES Act enactment (March 27, 2020).
The CARES Act also provides for a temporary, one-year waiver on required minimum distributions (RMDs) from retirement accounts in 2020.
Charitable Contribution Changes
This is a minor wrinkle in the CARES Act, but one worth noting: taxpayers who do not itemize deductions are allowed to take a $300 deduction from AGI for donations to charity. For those taxpayers who do itemize, the 60 percent limit on contributions compared to their AGI is lifted to 100 percent.
If you have questions about these or other aspects of the CARES Act, contact your RKL advisor or reach out to the RKL team using the form at the bottom of this page. Visit RKL’s Coronavirus Employer Resource Center to learn more about the CARES Act, read our latest guidance and register for our weekly webinar series.