Individual Income Tax Implications of the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Alerts / March 26, 2020

On March 25, 2020, the Senate passed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the Act). Included in the Act’s wide-ranging stimulus provisions are a number of considerations relevant to individual taxpayers, including individual recovery rebates, deductibility of charitable contributions and a one-time exclusion on employer repayment of student loans. For a discussion of retirement plan provisions, see our alert CARES Act to Provide Significant Employee Benefit Plan Relief for Participants and Plan Sponsors.

Recovery Rebates

The Act provides for recovery rebates of up to $1,200 for most U.S. residents, providing cash immediately to individuals and families. Married individuals who file a joint return are eligible for a rebate of up to $2,400. The rebate amounts increase by $500 for each child under age 17. No rebate will be made to anyone who is claimed as a dependent on another taxpayer’s federal income tax return. The rebate, which will be delivered via direct deposit when possible, acts as an advance payment of a refundable tax credit on the taxpayer’s 2020 federal income tax return.

The rebate amounts are reduced for higher income taxpayers and begin phasing out for taxpayers once adjusted gross income exceeds $75,000 (the phase-out threshold is $112,500 for heads of households and $150,000 for joint filers). For these higher income taxpayers, the rebate amount is reduced by $5 for each $100 that a taxpayer’s adjusted gross income exceeds the phase-out threshold, and it will be completely phased out when adjusted gross income exceeds $99,000 for single filers (with no children), $146,500 for heads of households with one child and $198,000 for joint filers with no children.

The Internal Revenue Service (IRS) will use the information on the taxpayer’s 2019 federal income tax return to determine rebate amounts and, if no 2019 tax return has been filed at the time of determination, the information will be based on the 2018 federal income tax return. If no 2018 federal income tax return has been filed, the IRS will use information on the taxpayer’s Form SSA-1099, Social Security Benefit Statement or Form RRB-1099, Social Security Equivalent Benefit Statement for 2019 to determine the rebate amount.

The rebates will not be reduced or offset to pay debts owed to other federal agencies, past-due legally enforceable state income tax obligations or unemployment compensation debts. In addition, the rebates will not be reduced or offset by other assessed federal taxes that would otherwise be subject to levy or collection.

The Act requires the Department of the Treasury to coordinate with the Social Security Administration and other relevant federal agencies to conduct a public awareness campaign regarding the availability of the rebates, including information with respect to individuals who may not have filed a federal income tax return for 2018 or 2019.

Charitable Contributions

Allowance of Partial Above the Line Deduction. To encourage Americans to contribute to charitable organizations in 2020, individuals will be permitted to deduct up to $300 of cash charitable contributions “above the line” on their 2020 federal income tax returns, i.e., whether or not individuals itemize their deductions. This “above the line” allowance will not apply to cash contributions to supporting organizations or donor advised funds.

Increased Limitations for 2020. The Act increases the deduction limitations on 2020 cash charitable contributions by corporations, as well as those by individuals who itemize their deductions.

  • For individuals, the limitation on cash contributions to 60% of individual adjusted gross income is temporarily suspended for 2020. However, cash contributions are still limited to the excess of adjusted gross income over the amount of all other charitable contributions, with any excess cash contributions carried forward to subsequent tax years.
  • For corporations, the limitation for cash contributions is increased from 10% to 25% of taxable income in 2020. Any excess corporate cash contributions will be carried forward to subsequent tax years.
  • The Act increases the limitation on deductions for charitable contributions of food inventory from 15% to 25% for 2020.

These increased deduction limitations likewise will not apply to cash contributions to supporting organizations or donor advised funds.

Employer Payment of Student Loans

The Act expands the existing exclusion for up to $5,250 of employer educational assistance, which currently applies to expenses such as tuition, fees and books, to include employer repayments of student loans. Employees may exclude employer student loan repayments made between the date of enactment and Dec. 31, 2020, but they are prohibited from deducting any employer-paid student loan interest expense excluded under this provision.

Authorship Credit: Elizabeth Ann Smith, Michelle M. Hervey and Naomi Meisels

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