It seems like every day there is a new announcement or change to the tax laws relating to Coronavirus relief. The massive CARES Act was passed into law on Friday with a number of tax provisions, while the Treasury department has released additional guidance regarding tax filing deadlines over the past few weeks. We are trying to stay on top of how this will impact you and we thought we’d try to answer some of your frequently asked questions.
Keep in mind, this is a fluid situation that changes daily and some of the legislation was written so quickly there will certainly be further explanations and clarifications to come. This is not an exhaustive list and we recommend you check out this great article from Jeff Levine, which covers all the details of the CARES Act. Let’s dig in to some questions:
Tax Deadline Extension (See this IRS FAQ for more details)
Do I have to file my income tax returns by April 15th? No, the IRS has extended all individual, trust and gift tax returns to July 15th. Most states have followed suit, but if you want to be sure about your state, check this AICPA guide, which is being updated regularly as states make changes.
What about my 2020 estimated taxes, do I still need to make my first payment by April 15th? No, Federal first quarter estimated tax payments have also been granted an extension to July 15th. As of right now, second quarter estimated tax payments are still due June 15th, so if no changes are made you will have to make a second quarter payment before you make your first quarter payment. Keep in mind this is for Federal tax payments, your state rules might be different so check the AICPA site for more info.
Does the extension also apply to my IRA and HSA contributions that were due by April 15th? Yes, the IRS also extended the deadline to make these contributions until July 15th.
I normally file an extension to October 15th, can I still do that? Yes, extensions can still be filed by July 15th that will extend the due date of your returns to October 15th. As always, any tax due with the returns would still need to be paid by the due date, which is now July 15th.
I have refunds on my tax returns, should I still wait until July 15th to file? No, if you have refunds you should file your returns as soon as they are completed.
I owe tax with my returns, should I still file them now and just pay later? If you already have your returns completed and are able to file them now, there’s no harm in doing so. However, until tax software companies catch up with updates to their systems, you likely won’t be able to schedule an electronic payment in July if you file now. An alternative option would be to file electronically now, but pay the amount due in July with a check and a voucher. Our software provider is working on an update to allow electronic payments in July for Federal taxes due, but they don't anticipate being able to schedule state tax payments for July.
What if I already filed my return and scheduled my tax due for electronic payment on April 15th? Unfortunately there is no easy way to cancel this scheduled payment. If we filed your returns for you, our software provider is unable to cancel this payment for you. The IRS recommends you contact the U.S. Treasury Financial Agent at 888-353-4537 to cancel the payment.
Am I going to get a rebate check? It depends on your adjusted gross income (AGI) reported on your most recently filed tax return. If you haven’t filed your 2019 return yet, that means it will be based on your 2018 tax return. If you filed a joint return and your income was below $150k or if you filed single and your income was below $75k, you WILL receive a rebate check. If your income was above those levels, your rebate check will be limited and if your income exceeds $198k for joint filers or $99k for single filers, you will not receive any rebate check.
How much will I get? If you are under the phaseout thresholds mentioned above, you will receive a check for $1,200 for each taxpayer and $500 for each child under the age of 17. So a husband and wife with two kids under 17 would be eligible for $3,400.
What if my income is much lower in 2020 than it was in 2018 or 2019? If your income falls below those thresholds when you file your 2020 tax returns, you will receive the rebate then. Unfortunately, that means anyone falling in this category has to wait until 2021 to receive any benefit from the rebate.
Will I need to repay the rebate check if my 2020 income is above the threshold but my 2019 income wasn't? No, there is no clawback of the rebate amounts.
I have not filed my 2019 returns yet, should the rebate checks impact my decision of when to file? If your income for 2018 and/or 2019 was close to the phaseout thresholds, you should consider what impact this will have. If your 2018 income was below the threshold but 2019 was above, you might want to delay filing. If your 2019 income was below the threshold but 2018 was above, you should probably file as soon as possible. It’s unclear when they will be assessing returns to determine rebate checks.
How will I get my rebate check? If you are currently receiving social security by direct deposit, they will use the same bank account for the rebate check. If you used a bank account for direct deposit or direct debit on your most recently filed tax return, they will use that bank account to send your money. Otherwise, they will send you a paper check.
When will we get our money? While the Treasury department is attempting to get these payments out “as soon as possible”, it’s likely to take at least a month.
Retirement Account Changes
If I need cash, can I take it out of my retirement account without penalty? Yes, the CARES Act allows distributions of up to $100,000 from IRA’s or employer sponsored plans to be exempt from the 10% penalty if you’ve been impacted by the Coronavirus because you:
Have been diagnosed with COVID-19, or
Have a spouse or dependent who has been diagnosed with COVID-19, or
Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease, or
Are unable to work because they lack childcare as a result of the disease, or
Own a business that has closed or operate under reduced hours because of the disease, or
Meet some other reason that the IRS decides to say is OK.
If I take a distribution from my retirement account will the income still be taxed? Yes it will be taxed, but by default the income will be spread over three years - 2020, 2021, and 2022. You can elect to include all the income in 2020.
What if it is just a temporary cash need, can I put the money back in? Yes, you have 3 years beginning on the day you receive the distribution to roll all or any portion of the distribution back into a retirement account. Any amount rolled back into a retirement account would not be subject to tax and amended returns can be filed to claim refunds for taxes paid.
Do I still need to take my required minimum distribution (RMD) this year? No, the CARES Act suspends RMD’s during 2020. We believe this applies to all RMD’s, including those being taken from inherited IRA’s.
What if I already took my RMD for 2020? If you already took your RMD for the year, and you don’t need that money, you have a couple possible options to put the money back into your IRA without penalty. First, if you took the distribution within the past 60 days, you should be able to do a rollover back into a retirement account, as long as you don’t violate the once-per-year rollover rule. Second, if you qualify as being impacted by the Coronavirus under the guidelines above, any distributions made this year are eligible for the 3 year rollover rule so you would also be able to put the distribution back. Unfortunately, these options are NOT available for RMD’s from an inherited IRA. If you already took and RMD from an inherited IRA there is no way to undo that.
If I don’t itemize on my tax return, will I receive any benefit from making charitable contributions during this challenging time? Yes, the CARES Act includes an above the line charitable contribution deduction starting in 2020 for up to $300. It’s not a large amount, but it is available to anyone who doesn’t itemize deductions on their returns. Since the Tax Cuts and Jobs Act went into effect for the 2018 tax year, a lot fewer individuals itemize deductions so this will be a nice benefit starting in 2020.
Did the CARES Act create any other incentives for charitable giving? Yes, the CARES Act also eliminates the AGI limitation for cash contributions. Under existing tax law, you are limited to cash contributions of 60% of your adjusted gross income. For 2020, if you have the financial ability to contribute the full amount of your income, you can take a full deduction for those contributions. They do have to be cash contributions and cannot be made to a donor advised fund.
Do I have to continue making my student loan payments? No, the CARES Act defers all student loan payments until September 30, 2020. No interest will accrue on the debt during this time.
I am a small business owner, what assistance am I eligible for under the CARES Act? One of the largest potential benefits of the CARES Act is the Paycheck Protection Program, which is a (partially) forgivable loan program offered through the Small Business Administration (SBA). This will allow businesses with less than 500 employees to obtain a loan of up to $10 million, or 2.5 times the average payroll costs over the previous year. An amount of this loan spent on specific items in the first 8 weeks after the loan is made is forgivable IF the business keeps their employee count the same. There are a lot of provisions in this program so if you are a small business owner we recommend you reach out to your CPA for further guidance.
What about payroll taxes, do we still have to pay them? Yes, you will still be responsible for paying the 6.2% payroll tax, but you can defer the payment from the time the bill was signed into law through the end of 2020. Half of the deferred payroll taxes would then be due on December 31, 2021 with the other half due on December 31, 2022.
Is there anything else important we should know about in the CARES Act? There are a lot of aspects of the bill we haven’t discussed here, such as the 5 year NOL carryback. If you had a net operating loss on your tax return in 2018, 2019 or 2020, you can amend tax returns dating back to 2013 to take advantage of the carryback. This provision applies to individuals and businesses.
Again, this is not a comprehensive list of items from the CARES Act, but if you have further questions please feel free to contact us.
-Chris Benson, CPA, PFS