Key Tax Law Changes of the CARES Act of 2020

Key Tax Law Changes

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, signed into law on March 27, 2020, includes many changes and provides much support for our country and its citizens.

The following is a brief summary of some of the provisions for individuals, families and small businesses.

Direct Payments

Citizens will receive direct rebate payments of $1,200 for individuals and $2,400 for married couples, plus $500 for each dependent child under the age of 17.  While this is technically a tax credit for 2020, the initial amount is based on your 2019 (or 2018 if 2019 is not yet filed) federal tax return.  Amounts are phased out if income is above the Adjusted Gross Income (AGI) threshold amount of $75,000 for single filers and $150,000 for joint filers.  If 2020 income is less than what was used to calculate the rebate, you will receive the difference when you file your 2020 tax return.

Unemployment

The CARES Act expands eligibility and provides an additional $600/week for up to 4 months in addition to what state programs pay.  The benefits are also now available for certain independent contractors and self-employed workers.

Required Minimum Distributions

Required minimum distributions (RMD) are suspended for 2020.  This applies to retirement account owners and beneficiary account owners who would normally be subject to RMDs in 2020.  If you’ve already taken your 2020 RMD, it may be possible for you to return any distribution that is not needed (this provision does not apply to beneficiary accounts), and therefore eliminate the tax on that distribution.

IMPORTANT: If your RMD is setup to be distributed automatically, make sure you adjust the date(s) if the RMD is not currently needed.

Retirement Account Withdrawals

Coronavirus related distributions of up to $100,000 from retirement accounts are allowed in 2020.  You must be “impacted by the Coronavirus” and there are certain guidelines to qualify.  There are several potential tax benefits for these distributions, including:

  • The distributions are exempt from the 10% penalty if you are under age 59 ½.
  • Employer sponsored plans are not subject to mandatory Federal tax withholdings on the withdrawals.
  • The distribution amounts can be repaid over a three year period to avoid owing tax.
  • If you do not repay the withdrawal amounts, you can elect to pay taxes on the full amount in 2020 or spread tax payments evenly over 3 years (2020, 2021 and 2022).  
  • Allowable loans from employer sponsored retirement plans, such as 401(k) and 403(b) plans, are increased from $50,000 to $100,000 for 2020.

Cash Gifts to Charitable Organizations

The AGI limit for cash contributions to qualified charitable organizations is temporarily increased to 100% (from 60%) for 2020.  This means in 2020, it is possible to eliminate all taxable income if you are charitability inclined.  Unfortunately the CARES Act prohibits these contributions to charitable gift funds (a.k.a. donor advised funds).  Gifts of cash to charitable gift funds will continue to fall under the normal limit of 60% of AGI.

Medical Expenses

Qualified medical expenses paid from Health Savings Accounts (HSA), Flexible Spending Accounts (FSA) and Archer Medical Savings Accounts (MSA) now permanently include over-the-counter medications and specified feminine care products. 

Small Business Provisions

There are a number of business tax provisions, including several provisions that apply to small businesses.

  • A small business loan program that offers the potential to have all or a part of the loan forgiven if the employer maintains payroll and uses the loan for payroll, rent, interest on mortgage and utilities.  Also, any amount forgiven will not be considered as income to the owner.  These loans, up to $10 million and based on a formula, must be applied for by June 30, 2020, and can have a maximum term of 10 years.  The loans are also capped at an interest of 4%, and payments are deferred for 6-12 months.  There are eligibility requirements, but if you meet the requirements, these loans can offer significant advantages over conventional loans. 
  • Companies can take net operating losses from 2018, 2019 and 2020 and carry them back for up to 5 years.
  • 2020 employer payroll tax payments may be deferred until 2021 and 2022.  50% would be due on December 31, 2021 and the remaining 50% on December 31, 2022.
  • The net interest deduction limitation has been increased from 30% to 50% for tax years 2019 and 2020.

This is just a brief summary of the many provisions in the CARES Act of 2020.  You should consult your accountant and/or financial advisor to discuss how the Act affects you and what actions you should take. 

Stay healthy and safe,

Evergreen Wealth Services

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