On March 27, 2020, Congress passed the $2 trillion CARES (Coronavirus Aid, Relief and Economic Security) Act, which provides for direct payments and loans to individuals and businesses, and establishes several provisions which may have a significant impact on your financial and tax planning.
New Tax Filing Deadlines: For the 2019 tax year, the original filing and payment due date of April 15, 2020 has been extended to July 15, 2020. The new deadline also applies to contributions to a Traditional IRA, Roth IRA, SEP IRA, or HSA. For those making estimated tax payments for the 2020 tax year, such payments are still due on the original due dates, except for the first quarter payment. We strongly advise you to contact your accountant or tax adviser to understand how these new deadlines impact your personal and business tax obligations, and to determine when you should file your return, especially if you are expecting a refund.
Cash Payments for Individuals: Individuals will receive a rebate payment of $1,200 ($2,400 for a joint return) plus $500 per qualifying child. It appears likely that such payment will be provided in the form of direct deposit or check based upon your most recently filed return or, if you did not file a return because you are a Social Security recipient, your 2019 Social Security information. The payment will be reduced by 5% of your adjusted gross income that exceeds $150,000 for joint returns, $112,500 for head of household returns, and $75,000 for single returns. In other words, the payment is completely phased out at an adjusted gross income of $198,000 or more for married filers and $99,000 or more for single filers.
Unemployment: For those who have lost their job, the federal government will give unemployed workers an extra $600 a week for four (4) months, in addition to state benefits.
Required Minimum Distributions: The CARES Act allows for a one (1) year waiver in required minimum distributions (RMDs) for defined contribution plans under §403(a), §403(b), IRAs, and Section 457 plans. The intended purpose of this provision is to give taxpayers a chance to let their IRAs recover. Also, inherited IRAs or retirement plan accounts required to be depleted within five (5) years can skip the 2020 year, thereby extending the required timeframe to six (6) years.
Needed Distributions: For those needing to utilize retirement savings during these times, the CARES Act waives the 10% penalty on early distributions for 2020 coronavirus-related purposes, up to a maximum of $100,000. This applies to a variety of circumstances, including without limitation, persons, spouses, dependents diagnosed with COVID-19 and persons experiencing financial difficulties as a direct result of the disease.
Qualified Plan Loans: The amount you can borrow from your retirement plan is temporarily increased to either $100,000 or 100% of the vested account balance, whichever is less. This will be in effect for 180 days, starting on March 27, when the Act was passed. If an existing retirement plan loan comes due between March 27 and December 31, 2020, you have a one (1) year extension to pay it.
Charitable Deductions: Even if you do not itemize deductions, you can take an above-the-line deduction of up to $300 for charitable cash contributions made to §501(c)(3) organizations on your 2020 tax return. If you can itemize deductions on your 2020 return, the 60% adjusted gross income limitation for charitable contribution deductions is suspended, letting you deduct as much as 100% of your 2020 adjusted gross income.
Deducting Business Losses: Under the CARES Act, you are permitted to use business losses to claim refunds on your returns, suspending some of the provisions in the Tax Cuts and Jobs Act of 2017.
Small Businesses: Employers with fully or partially closed businesses due to the coronavirus lockdown, or whose gross receipts declined by more than 50% when compared to the same quarter in the previous year, are eligible for a refundable credit against payroll taxes equal to 50% of qualified wages paid to employees. Depending on the number of workers employed, the credit is limited to $10,000 of wages per employee for the period of March 13 through December 31 and must be reduced by any credits claimed under the Families First Coronavirus Response Act. The Payroll Protection Program provides federally guaranteed loans to small businesses with no more than 500 employees, as well as sole proprietors, independent contractors, and other self-employed individuals. Employers with fewer than 500 employees are required to provide paid sick leave or family leave to employees forced to stay home due to quarantining, caring for a family member or caring for a child whose school or daycare location is closed. Employers will be eligible for a refundable credit against the payroll portion of the tax on the qualified paid sick leave and qualified family leave.
In sum, the CARES Act provides many avenues of relief, and we encourage you to contact your tax adviser or legal counsel for further information. If you have any questions, Woodburn and Wedge is here to assist you.
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