Individual recovery rebate/credit

Under the CARES Act, an eligible individual will receive an advance payment for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return) (2)$500 for each qualifying child of the taxpayer. For purposes of the child tax credit, the term “qualifying child” means a qualifying child of the taxpayer, as defined for purposes of the dependency exemption who hasn’t attained age 17.   Individuals who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs such as SSI benefits, are eligible for the credit and the advance rebate.

Eligibility for credit. For purposes of the credit, an “eligible individual” is any individual other than a nonresident alien or an individual for whom a dependency deduction is allowable to another taxpayer for the tax year. Estates and trusts aren’t eligible for the credit

Children who are (or can be) claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent. An individual who wasn’t an eligible individual for 2019 may become one for 2020, e.g., where the individual was a dependent for 2019 but not for 2020. IRS won’t send an advance rebate to such an individual, because advance rebates are generally based on information on the 2019 return (see below). However, the individual will be able to claim the credit when filing the 2020 return.

 

Phase out of credit. The amount of the credit is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers

Under these rules, the credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500.

Advance rebate of credit during 2020. Each individual who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the advance refund amount for 2019. The “advance refund amount” is the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019.

IRS will refund or credit any resulting overpayment as rapidly as possible. No interest will be paid on the overpayment.

If an individual hasn’t yet filed a 2019 income tax return, IRS will determine the amount of the rebate using information from the taxpayer’s 2018 return. If no 2018 return has been filed, IRS will use information from the individual’s 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.

In other words, even though the credit is technically for 2020, the law treats it as an overpayment for 2019 that IRS will rebate as soon as possible during 2020.

Most eligible individuals won’t have to take any action to receive an advance rebate from IRS. This includes many low-income individuals who file a tax return to claim the refundable earned income credit and child tax credit.

IRS may make the rebate electronically to any account to which the payee authorized, on or after Jan. 1, 2018, the delivery of a refund of federal taxes or of a federal payment.

No later than 15 days after distributing a rebate payment, IRS must mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.

No advance rebate will be made or allowed after Dec. 31, 2020. Advance rebate reduces credit allowed for 2020. The amount of credit that is allowable for 2020 must be reduced (but not below zero) by the aggregate advance rebates made or allowed to the taxpayer during 2020.

If the taxpayer received an advance rebate during 2020 that was less than the credit to which the taxpayer is entitled for 2020, the taxpayer will be able to claim the balance of the credit when filing the 2020 return. If, on the other hand, the advance rebate received was greater than the credit to which the taxpayer is entitled, the taxpayer won’t have to pay back the excess. That is because the 2020 credit can’t be reduced below zero.

Identification number requirement. No credit will be allowed to an eligible individual who doesn’t include the individual’s valid identification number on the tax return for the tax year.

Additional unemployment assistance. The base amount of unemployment by the state will be increased by $600. The additional amount is available for up to four months. The length of unemployment benefits is also extended by 13 weeks. ( See the blog titled Expansion of Unemployment Benefits for more detail)

No 10% additional tax for corona virus-related retirement plan distributions

Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty. Income inclusion can be spread over the next three years. Repayment of distributions during the next three years will be treated as tax free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 will be extended for a year. Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts

$300 above-the-line charitable deduction

The CARES Act adds a deduction to the calculation of gross income, in the case of tax years beginning in 2020, for the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the tax year. For this purpose, the term “eligible individual” means any individual who does not elect to itemize deductions. (Code Sec. 62(f)(1), as amended by Act Sec. 2204(b))

The term “qualified charitable contribution” means a charitable contribution (as which is made in cash to a qualified charitable organization

Increase in limits on contributions of food inventory

Background. A donation of food inventory to a charitable organization that will use it for the care of the ill, the needy, or infants is deductible in an amount up to basis plus half the gain that would be realized on the sale of the food (not to exceed twice the basis). In the case of a C corporation, the deduction cannot exceed 15% of the corporation’s income. In the case of a taxpayer other than a C corporation, the deduction cannot exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer’s charitable deductions for the year. (Code Sec. 170(e)(3)(C)) New Law. In the case of any charitable contribution of food during 2020, the taxable income limits are 25% rather than 15%.