By Justin Smith
President Trump signed the 2020 Coronavirus Aid, Relief, and Economic Security Acts (the CARES Act) into law last Friday. The legislation is estimated to be worth more than $2 trillion, and provides substantial relief to taxpayers resulting from COVID-19.
The most visible components of the legislation are the Recovery Rebates, which are advance payments of a fully-refundable 2020 tax credit. Single filers will receive a maximum $1,200 credit, and married filers will receive a maximum $2,400 credit, along with another $500 per qualifying child under 17 years old. The credit begins phasing out for incomes above $75,000 ($150,000 for married filers, and $112,500 for heads of household). The credit is not available for taxpayers who file as dependents. Taxpayers will reduce the credit on their 2020 tax return by the amount of the advance credit received.
Also, if you receive a lower advance credit than you are eligible for, you may claim the remainder of it on your 2020 tax return filed next year. The U.S. Treasury anticipates commencing the distribution of payments within three weeks, and will focus on direct depositing them as much as possible.
Other key items included in the legislation are the temporary increase of the charitable contribution deduction to a maximum 100% of adjusted gross income, and an adjustment to income (not subject to itemizing deductions) of up to $300 for charitable gifts.
Self-employment and payroll tax due dates are deferred – 50% of 2020 taxes due are delayed until Dec. 31, 2021 with the rest due by December 31, 2022. This is great news for self-employed taxpayers and small business owners.
Importantly, the legislation allows you withdraw up to $100,000 from retirement accounts by year-end without paying the 10% early withdrawal penalty.
Many other items are included in the legislation, along with the recently-passed Families First Act that provides significant expansion of paid sick leave and related tax credits to small employers to help them afford paying impacted employees (through the end of 2020).
It is as important as ever to do your best to manage your finances wisely during this (hopefully brief) economic downturn. Financial expert Dave Ramsey provides terrific advice for individuals experiencing financial hardships, especially for those who have been furloughed or laid off. Tighten up the budget, determine what employer benefits you may still be eligible for, explore unemployment and other similar benefits, focus on your key needs first (food, utilities, and transportation) followed by other bills such as rent or mortgage and consider seeking temporary employment.
Lastly, don’t forget to file your 2019 tax return as soon as possible despite the filing deadline deferral.
Refunds are continuing to be processed normally, so choose e-filing with direct deposit to get additional cash in your pocket as soon as possible. Even if you will owe taxes, it’s better to know exactly what your bill is so you can plan and budget for it at the right time.
Please reach out to me or your tax professional if you have further questions about your specific tax situation during this time.
Justin Smith is a licensed certified public accountant in Opelika, specializing in individual and small business tax and accounting. He can be contacted at 334-400-9234 or Justin@JSmithCPA.net. His web site is www.jsmithcpa.net.