CLARION, Pa. – Clarion H&R Block submitted the following article: H&R Block Talks About the Individual Tax Changes in the Cares Act.
Recovery rebate credit (stimulus payments)
A one-time refundable, advanceable credit of $1,200 per individual ($2,400 for joint filers) plus an additional $500 per child who qualifies for the child tax credit.
Eligible taxpayers. Most taxpayers are eligible for the credit. Nonresident aliens, anyone claimable as a dependent, and taxpayers who do not have SSNs are ineligible. A qualifying child may have an SSN or an ATIN. Also, there is an SSN exception for a married member of the Armed Forces if either spouse has an SSN.
Figuring the recovery rebate credit. In general, the credit is based on adjusted gross income (AGI) and household composition information on the taxpayer’s 2019 tax return. The credit phases out (decreases) by 5% of AGI over $75,000 ($112,500 for head of household and $150,000 for joint filers).
– 2018 tax return information will be used if 2019 is not available.
– Social security or railroad retirement information (Form SSA-1099 or RRB-1099) may be used if no tax returns are available.
Paying the recovery rebate credit. The Treasury Department will advance the credit as soon as possible. It will be direct deposited to the taxpayer’s bank or financial account if the taxpayer authorized electronic information in 2018 or 2019, i.e. authorized a direct deposit or direct debit. Otherwise, the advance will be mailed to the taxpayer’s last known address.
– Most taxpayers will not have to take any action to receive the advance.
– The payment may be offset to pay past-due child support but not for any other outstanding federal or state debts.
– Any additional credit due the taxpayer will be paid as a refundable credit when the taxpayer files their 2020 tax return.
Example. Jack and Jill filed a joint tax return for 2018. They claimed the child tax credit for their two children, Jane and Joe, ages 6 and 8. Their AGI was $70,000. They have not yet filed a 2019 return. Jack and Jill will receive a stimulus payment of $3,400 [($2,400 + ($500 × 2)]. If they authorized direct deposit or direct debit on their 2018 tax return, they’ll receive the payment electronically.
Retirement provisions
COVID-19 related distributions
Eligible individuals may take penalty-free COVID-19 related distributions of up to $100,000 from retirement plans or IRAs during 2020.
– Distributions can be repaid within the three-year period beginning on the day after the distribution is received.
– Amounts can be included ratably in income over a three-year period.
Eligible individual. An eligible individual is one who is:
– Diagnosed with COVID-19 by a CDC-approved test or whose spouse or dependent is diagnosed with the illness, or
– Experiencing adverse financial consequences as a result of being quarantined, furloughed, or laid off; or having to provide childcare because of a school or daycare closure, or having to close or reduce operating hours of a business.
Retirement plan loans. Plan loan limits are increased from $50,000 to $100,000 and loan repayment may be delayed up to one year. This provision is effective starting with March 27, 2020 through September 23, 2020 (i.e. 180 days after the date of enactment).
Required minimum distributions (RMDs)
The requirement to take an RMD is waived for tax year 2020. The temporary waiver applies to IRAs and 401(k)s, 403(a) annuity plans, 403(b) tax-sheltered annuity plans, and 457(b) state and local government plans.
– The waiver applies to RMDs for tax year 2020.
– The waiver also applies to taxpayers with a required beginning date in 2019 who opted to take their first RMD in 2020 (by April 1) but have not yet done so.
– Beneficiaries subject to a five-year distribution requirement from an inherited IRA will get an extra year to distribute all funds.
Charitable provisions
New above-the-line charitable deduction. In 2020, taxpayers who do not itemize deductions may take an above-the-line deduction up to $300 for cash contributions to qualified charities.
AGI limitations. The 50% of AGI general limitation on cash contributions to qualified charities is temporarily increased. For tax year 2020, taxpayers may contribute up to their AGI. Excess amounts may be carried forward.
Health savings accounts (HSAs) and other tax-favored health accounts
Over-the-counter (OTC) medications, may be purchased with funds from HSAs, health flexible spending accounts (FSAs), health reimbursement arrangements (HSAs), and Archer MSAs.
– This change is effective starting in 2020 and permanently removes the previous ACA restriction. It will allow taxpayers to purchase OTC products such as pain and allergy relief medications without a prescription.
– The Act also adds menstrual care products to the list of items treated as medical care for tax-favored account purposes.
Student loans
Taxpayers may exclude up to $5,250 from taxable income student loan principal or interest amounts paid by employers.
– The $5,250 cap applies to student loan payments and employer education assistance payments combined.
– Taxpayers may not claim the student-loan interest deduction for employer-paid interest.
– The provision is effective starting with March 27, 2020 through the end of 2020.
Business tax changes in the CARES Act
Note: In addition to the new employee retention credit described in the next section, the CARES Act also makes provisions to advance the employer credit for paid emergency sick and family leave introduced in the Families First Coronavirus Response Act (FFCRA). We expect additional guidance on the advance mechanism.
Employee retention credit
A refundable payroll tax credit of 50% of qualified wages paid to employees during the pandemic crisis.
Eligible employer. The credit is available for employers who have:
– Fully or partially suspended operations due to a COVID-19 related shut-down order, or
– Gross receipts that decline by more than 50% when compared to the same quarter last year.
– For the gross receipts test, eligibility ends the calendar quarter for which gross receipts are greater than 80% when compared to the same quarter last year.
Qualified wages. Qualified wages fall into two categories, depending on the size of the business.
– For employers with more than 100 employees, wages must be paid to employees when they are not providing services due to one of the above COVID-19 related circumstances.
– For employers with 100 or fewer employees, all wages qualify, whether or not the employer is open for business.
– This provision is effective for wages paid or incurred March 13, 2020, through December 31, 2020.
Figuring the credit. The credit is for 50% of the wages the employee would have been paid for the same amount of time during the 30 days immediately preceding the credit period. The credit applies to the first $10,000 of compensation for all quarters, including certain health benefits, paid to an eligible employee.
– Employers who take covered loans are not eligible for the credit.
– Employers will not be subject to failure to make payroll deposits if the failure was due to reasonable anticipation of claiming this credit.
Example. Benny’s Bakery continues to pay employee Bella her full week’s wages the week of March 23 even though the store had to cut back on operations during that week because of COVID-19 related circumstances. Bella’s wages for a full week would ordinarily be $800. Benny’s Bakery is eligible for a credit of $400 ($800 × 50%) for the wages paid to Bella during the first week of the disruption period. Assuming equivalent wages of $800 per week, Benny’s Bakery may receive a 50% payroll credit for the ongoing disruption up to the first $10,000 of Bella’s wages.
Payroll tax postponement
Employers may delay paying their share of social security taxes on wages paid to employees. The employer’s share of social security tax is 6.2% of wages up to the 2020 wage base of $137,700 (maximum postponement $8,537.40).
Deferral period. Employers must pay one-half of the deferred taxes by December 31, 2021 and the other half of deferred taxes by December 31, 2022.
– Medicare taxes (1.45% of wages with no ceiling) are not
– The employee portion of social security and Medicare taxes is not
Self-employed taxpayers. Self-employed individuals, including Schedule C and Schedule F filers may likewise defer one-half of 2020 social security taxes (6.2% of net earnings up to $137,700) for estimated tax purposes.
Depreciation
The Cares Act fixes the “retail glitch” that previously applied to qualified improvement property.
– By classifying qualified improvement property as 15-year property it can be immediately expensed.
– For ADS purposes, qualified improvement property is depreciated over 20, rather than 39 years.
The change is retroactive to tax years beginning after December 31, 2017 (tax year 2018 for calendar year taxpayers).
Operating loss and business interest provisions
The Cares Act temporarily modifies many of the TCJA changes and limitations that had generally applied to operating losses and business interest starting in 2018.
Net operating loss (NOL) modifications
– Losses arising in tax years 2018, 2019, and 2020 can be carried back to each of the five years preceding the year of the loss.
– For tax years beginning before January 1, 2021, the 80% taxable income limitation is temporarily repealed.
– For tax years after December 31, 2020, the NOL is calculated by adding amounts carried over from before January 1, 2018 plus the lesser of a) aggregate NOLs from tax years beginning after December 31, 2017, or b) 80% of excess of taxable income.
Excess business losses of noncorporate taxpayers. The CARES Act modifies the TCJA loss limitation that applied to taxpayers other than corporations. Excess business losses arising in tax years after December 31, 2017 through December 31, 2020 are allowed.
Credit for prior year minimum tax. The CARES Act accelerates a corporation’s ability to claim a refundable credit for AMT.
– The corporation may claim the credit for 2018 and 2019 instead of over tax years 2018 through 2021.
– The corporation may instead elect to claim the entire credit in 2018.
Business interest limitations. The CARES Act increases the amount of deductible business interest.
– The Act effectively reduces the business interest limitation by increasing the allowable business interest deduction percentage from 30% to 50% for tax years 2019 and 2020.
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