Below we have summarized some of the key points for individual taxpayers:
Special Rules for Use of Retirement Funds
The CARES act has defined special provisions for use of retirement funds for taxpayers affected by the Coronavirus outbreak. The act allows for up to $100,000 in Coronavirus-related distributions, without an early withdrawal penalty, from eligible retirement plans. To qualify for a “Coronavirus-related distribution”, the distribution must occur on or after the date of the enactment AND before December 31, 2020.
The distribution must be made to an individual:
- Who is diagnosed with the virus by a CDC approved test,
- Whose spouse or dependent has been diagnosed with the virus by a CDC approved test, or
- Whom experiences adverse financial consequences as a result of quarantine, furlough, layoffs, work hour reductions, or an inability to work due to lack of childcare as a result of the virus.
Qualified coronavirus-related distributions will be included in gross income over a three-year period unless the taxpayer elects otherwise. These distributions may also be recontributed to an eligible plan within three years of receiving the distribution. Any recontributed amounts are to be treated as though they were originally eligible rollover distribution not subject to tax, and recontributions do not count against annual contribution limits. Additionally, the plan receiving the repayment does not need to be the same plan from which funds were originally withdrawn, if the receiving plan is eligible for rollover contributions.
The CARES act also increased the maximum loan amounts from qualified retirement plans. The maximum loan amount has increased from the lesser of $50,000 or 50% of the vested balance, to $100,000 or 100% of the vested balance. This increase applies to loans made between the enactment date and December 31, 2020.
If a qualified individual has a loan repayment due date after the enactment date, and before December 31st, 2020, the payment due date is delayed one year. For the purposes of loan payment extensions, a qualified individual must meet the same criteria detailed for coronavirus-related plan distributions.
Finally, the CARES act has waived required minimum distributions, regardless of whether the taxpayer is impacted, for the 2020 calendar year.
Changes to Charitable Contribution Deductions
With the CARES act, there will be significant changes to how charitable contributions can be deducted, for tax years beginning after December 31, 2019.
For tax years after 2019, eligible individuals may directly reduce their adjusted gross income by up to $300 with an above-the-line deduction for qualified charitable cash contributions. Individuals are eligible for this deduction if they do not otherwise claim itemized deductions on Schedule A.
The qualified receiving organization cannot be a donor advised fund, nor a supporting organization. Qualified contributions do NOT include any cash contributions carried over from previous years.
The CARES act has temporarily suspended AGI limits for charitable contribution deductions for the 2020 tax year. At the individual level, a taxpayer can claim a deduction for qualified contributions up to 100% of their AGI for that tax year. The deduction cannot exceed AGI, but carryover of any excess contributions to future tax years is allowed.
Updates to NOL Rules
The CARES act has established updated rules for Net Operating Losses (NOLs). Any NOL incurred during the 2018, 2019 or 2020 tax year(s) may be carried back five years unless the carryback period is waived. The rule limiting NOL deductions, incurred from the 2018 tax year forward, to 80% of taxable income in a carryback or carryforward year, has been suspended for the 2018, 2019 and 2020 tax years.
The CARES act has also provided for an extension of time to waive the five-year carryback for 2018 and 2019 NOLs. The time for making a valid waiver election, for NOLS incurred in the 2018 or 2019 tax year, has been extended to the due date (including extensions) for filing the taxpayer’s return for the first tax year ending after March 27, 2020.
Temporary Relief for Government Student Loans
As a result of the CARES act, all payments due for federal student loans have been suspended for 3 months. During this period, no interest shall accrue on the loan. These provisions may be extended for an additional three months if deemed necessary.