March 31 2020

COVID-19 pandemic: emergency tax measures – extensive individual tax relief (CARES Act) enacted

Source: IBFD Tax Research Platform News

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (H.R. 748) signed by President Trump on 27 March 2020 includes provisions that provide tax relief to individuals in response to the economic consequences of the COVID-19 pandemic.

Significant provisions are set out below.

Excess business losses

The limitation on the deduction of excess business losses by individuals and pass-through entities is suspended for the 2018, 2019 and 2020 taxable years. In addition, a number of technical corrections were made to the statutory provision with regard to the computation of the deduction.

Charitable contributions

An "above-the-line" deduction is permitted for cash contributions made to qualified charitable organizations in 2020, up to an amount of USD 300. The "above-the-line" deduction permits the deduction to be claimed by taxpayers who do not claim itemized deductions. Taxpayers who itemize their deductions are permitted to claim a charitable deduction of up to 100% of adjusted taxable income (AGI) in 2020 rather than the currently applicable 50%.

Early withdrawals from retirement plans

The 10% penalty for early withdrawals from eligible retirement plans is waived on withdrawals up to a maximum amount of USD 100,000. The related income tax on the withdrawn amount may be paid over a 3-year period, or the individual may re-contribute the withdrawn amount to the retirement plan within the 3-year period.

The waiver applies to individuals: (1) who have been diagnosed with the coronavirus; (2) who have a spouse or dependent who has been diagnosed with the coronavirus; or (3) who experience adverse financial consequences as a result of the coronavirus, including being quarantined, furloughed, laid off from work, having work hours reduced, being unable to work due to lack of child care, a closure or reduced hours of a business owned or operated by the individual due to the coronavirus, or other factors as determined by the Secretary of the Treasury.

The limit on the amount that may be borrowed from qualified retirement plans is increased from USD 50,000 to USD 100,000 if the funds are necessary to provide relief related to COVID-19. In addition, the normal 5-year term of such loans may be extended for an additional year. The repayment of currently outstanding loans may also be delayed for 1 year under qualifying circumstances.

Required minimum distributions from retirement funds

The requirement to take minimum distributions (RMDs) from defined contribution plans, including Individual Retirement Accounts (IRAs) is waived for 2020. The RMD rules currently require individuals who are 72 years of age or older to make minimum annual withdrawals from qualified retirement plans and pay any related income tax imposed on the withdrawal, but such RMDs will not be required to be taken for 2020.