By: Benjamin Branche
Section 6428. 2020 Recovery Rebates for Individuals
Due to significant financial hardships foist upon individuals at this difficult time, the Senate approved the Recovery Rebate. The amount of the rebate is $1,200 for those filing tax returns as an individual, and $2,400 for individuals filing joint tax returns. The rebate is paid as an advanced refundable tax credit, and is available to “eligible individuals.” This means any individual other than (1) any nonresident alien individual, (2) any individual to whom a deduction under section 151 is allowable to another taxpayer, or (3) an estate or trust.
The amount of the rebate is reduced for taxpayers that have adjusted gross income in excess of $150,000 for joint filers, $112,500 for head of household filers, and $75,000 for individual filers. The calculation of the phase out equates to $50 per $1,000 of income earned. As a result of income limitation, the rebate is phased entirely out at $99,000 for single taxpayers with no children and $198,000 for joint taxpayers with no children. Taxpayers will also receive a tax credit equal to $500 per child.
The tax year for determining adjusted gross income is 2019. However, if a taxpayer has not filed his or her 2019 income tax return, the 2018 reported adjusted gross income will be used for determining the amount of the rebate. For those taxpayers who receive a reduced rebate due to a greater adjusted gross income in 2018 versus, 2019, they will be permitted to make up the difference in their 2020 tax return. Alternatively, if the taxpayer receives a greater refund than permitted under the act, they will not have to pay it back and will not be charged interest on the excess. The rebate is even available to individuals who do not have income.
However, the rebate cannot be used to pay debts owed to other federal agencies, state income tax obligations, and unemployment compensation debts (but not for past-due child support).
According to the Act, the rebates will be sent out by the Secretary of the Treasury as “rapidly as possible.”
Section 2202. Special Rules for Use of Retirements Funds
Typically an early withdrawal from a retirement plan, IRA, 401k, 403b, or other similar qualified plan will result in a 10% additional tax penalty for premature distributions. However, the CARES Act waives the 10% additional tax penalty for premature distributions relating to the coronavirus up to $100,000, subject to certain limitations. Although not subject to the 10% penalty, the distributions are still subject to income tax. The distribution may be included on the income tax return for the year the distribution was received; however, the Act gives the taxpayer the right to pay the tax prorated over three (3) years beginning with the tax return for the year the distribution was received. One receiving a premature distribution may re-contribute an amount equal to the amount received to an eligible retirement plan within three (3) years without regard to that year’s cap on contributions.
Of greatest importance, the distribution must be to (a) an individual who has been diagnosed with SARS-CoV-2 or COVID-19 by a test approved for by the Center for Disease Control, or his or her spouse or dependent who has been diagnosed, (b) an individual who is suffering financial difficulties as a result of being quarantined, furloughed, laid off, or limited in the amount of work, or (c) is unable to work because of child care. Such distribution must be made (or have been made) between January 1, 2020 and December 31, 2020. In order to verify this information a plan administrator may rely on a certification of the participant and is not required to do any further investigation into the circumstances. Distributions will be deemed to meet the permissible distribution requirements of section 401(k), which essentially means they will satisfy the hardship distribution provisions of the code, meaning that no tax withholdings have to be made.
Section 2202(b) increases the dollar limit on loans from qualified plans to $100,000 from $50,000 and increases the percentage test limit for loans from half the present value of the participant’s benefit to the present value of the entire benefit under the plan. The Act also permits the extension of the payment on a loan for one (1) year from the original due date if the loan repayment is due between the CARES Act enactment and December 31, 2020. The provision does not modify the interest terms, but shall modify the repayment amounts. Further, the loan limit increase and payment limitations are limited to those individuals who are covered individuals entitled to penalty free distributions set forth above.
The time period for retirement plan and annuity contract amendments is also extended. A retirement plan or annuity contract does not violate IRC Section 411(d) (6) or Section 204(g) of the Employee Retirement Income Security Act of 1974 if it files a late amendment, so long as the plan is operated as if the amendment is in effect and any subsequent writing is retroactive. In order for the provisions of the section to apply to any amendment to any plan or annuity contract, it must be made (a) pursuant to the provisions of the CARE Act, or any regulation by the Secretary of the Treasury or the Secretary of Labor under the provisions of the Act, and (b) it must be made by the last day of the plan year beginning on or after January 1, 2022 (in the case of governmental plans, that date is the last day of the plan year beginning on or after January 1, 2024). The Secretary of the Treasury can delay these dates.
Section 2203. Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts
This Section permits a one-year delay in required minimum distributions (RMDs) for defined contribution plans described in Code section 401(a), as well as for defined contribution plans described in section 403(a) and (b), IRAs, and section 457 plans. Defined benefit plans do not appear to qualify for these protections. The delay applies to both 2019 RMDs that needed to be taken by April 1, 2020 and 2020 RMDs. The CARES Act also adds the special rollover rules similar to the ones enacted in 2009, allowing amounts subject to the RMD rules in 2020 to be rolled over.
Sec. 2204. Allowance of Partial Above the Line Deduction for Charitable Contributions
In order to incentivize charitable giving, the CARES Act amends the tax code to provide for a charitable deduction up to $300 to be taken even if a taxpayer does not itemize deductions.
Section 2205. Modification of Limitations on Charitable Contributions during 2020
Prior to the Act, individual taxpayers were only allowed to cut up to fifty percent (50%) of their gross income. The CARES Act has suspended this limitation. Additionally, the Act increases the limitation on corporate charitable deductions from ten percent (10%) to twenty-five percent (25%), and increases the limit on charitable contributions of food from fifteen percent (15%) to twenty-five percent (25%).
Benjamin Branche is a business attorney and partner in the Lawrenceville, NJ law firm of Szaferman, Lakind. He can be reached at 609-275-0400 or via email at firstname.lastname@example.org.
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The foregoing is intended for general information purposes and is no substitute for specific legal advice.