What is the CARES Act?
In March of 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (officially referred to as H. R. 748) was passed.
The CARES Act stimulus package is designed to provide relief and stimulate the U.S. economy as part of the national emergency relief operations during the COVID-19 pandemic.
Most aspects of the CARES Act have already been applied, but here are the basics and how they could affect you in 2021.
What is an Economic Impact Payment (EIP)?
An Economic Impact Payment (or EIP) is a stimulus payment provided to taxpayers by the CARES Act. Those who file their own taxes but can be claimed as a dependent, however, are not eligible for a stimulus payment—so adults who are claimed by another taxpayer (like college students, elderly parents, etc.) aren’t eligible for an EIP.
Single adults receive $1,200. Married adults filing jointly receive a combined $2,400, and each qualifying child in a given household adds another $500 to the total amount.
If your AGI is above $75,000 as a single filer, the stimulus relief starts phasing out at a rate of $5 for every $100 you make above the threshold. The relief phases out completely once AGI reaches above $99,000.
For married couples filing jointly, the phaseout begins at $150,000 and ends when AGI exceeds $198,000. Heads of household start phasing out at $112,500, and the stimulus amount hits $0 when AGI exceeds $136,500.
If you have qualifying children, your total phaseout amount will increase by $10,000 for each qualifying child—so a head of household filer with two children would phase out at $132,500 instead of $112,500.
When were the EIP stimulus payments sent?
The IRS began sending economic impact payments in April of 2020; most taxpayers did not need to take any action to receive their payment.
The Department of the Treasury used info from 2019 tax returns to determine AGI, qualifying children, and whether to send payments by check or direct deposit. If you hadn’t filed your 2019 taxes, your 2018 tax return information was used.
The Get My Payment tool allowed taxpayers to choose how to receive their EIP, and the tool also helped track stimulus payments.
How do EIPs work for those with government benefits?
If you collect certain government benefits but didn’t file in 2018 or 2019 because you are usually not required to file, the IRS coordinates with the appropriate organization to know where to send your Economic Impact Payment. This group includes:
- Social Security recipients
- Railroad Retirement recipients
- Social Security Disability Insurance (SSDI) recipients
- Veterans Affairs (VA) benefit recipients
- Supplemental Security Income (SSI) recipients
Your EIP is delivered the same way you would normally receive your benefits, either through direct deposit or by paper check.
How do those with government benefits get the additional $500 per child?
To receive the $500 stimulus payment per child as part of your initial payment, you must have used the Non-Filers tool. If you receive government benefits, aren’t required to file a tax return, and never received the additional $500 per qualifying child, you would have used the Non-Filers: Enter Payment Info tool to update your information. SS, SSI, RR, and VA recipients were required to act by Wednesday, September 30, 2020, to receive their additional payment in October. If you didn’t receive the additional $500 in 2020, you might be able to claim the additional amount by filing a 2020 tax return and claiming the Recovery Rebate Credit.
Do taxpayers with no government benefits who aren’t required to file qualify for an EIP?
Yes—for those who didn’t file a tax return in 2018 or 2019 and didn’t receive any of the benefits listed above, the IRS released the Non-Filers: Enter Payment Info tool for Economic Impact Payment registration.
The tool is now closed, but any amount that was not received in 2020 may be available via the Recovery Rebate Credit when you file your 2020 tax return.
Does the CARES Act allow me to use retirement funds for COVID-19 costs without penalty?
Typically, taking an early distribution from your retirement plan means paying both an income tax and a 10% penalty. The CARES Act, however, allows taxpayers to take up to $100,000 penalty-free for a coronavirus-related distribution.
To qualify as “coronavirus related,” the distribution must have been made by a taxpayer who is diagnosed with SARS-COV-2 or COVID-19 by a CDC-approved test for either themselves, a spouse who meets the above qualifications, or, if not directly infected, experiences a hardship due to quarantine, lack of work, or childcare in 2020.
Though the distribution is taxed, the tax can be spread over a 3-year period. If the distribution is repaid (or recontributed to a qualified plan) within that 3-year period, the taxpayer can avoid any income recognition, making it “tax-free.” You would file amended returns to reclaim the taxes paid.
You should receive a 1099-R from the custodian of your retirement savings account showing the amount of the withdrawal. IRS Form 8915-E, which is filed with your tax return, is used to report the distribution, any taxes paid, and any repayment.
What tax relief is provided by the CARES Act for charitable donations?
While charitable contributions are usually only deductible if you itemize, the CARES Act allows for a $300 above-the-line deduction for donations to qualifying charitable organizations. Taxpayers can take both this deduction and their standard deduction without having to itemize, and it’s here to stay – you can continue to take this deduction beyond 2020.
Note: If you do itemize, you would not also take the new above-the-line deduction.
The CARES Act also changes the limitation on qualified cash charitable contributions from 60% to 100% of AGI, in 2020.
Employer Payment of Employee Student Loan Debt Not Taxed as Income
Usually, any payments an employer makes for student loan debt of an employee is counted as taxable income to that employee. The CARES Act now allows $5,250 of employer-paid student loan payments to be tax-free in 2020. Note that this limit also applies to current employer-paid education expenses, so current and loan payment expenses are only tax free for the first $5,250 of combined expenses.
Any student loan interest will not be deductible to the employee if it is covered by the tax-free amount.
Will the CARES Act affect me in 2021?
Yes—when you file your 2020 tax return before April of 2021, some tax breaks provided by the CARES Act will affect your taxes. For example, unemployment benefits are taxable as income, so be sure to check and see whether income taxes have been withheld or, if not, how much you should set aside for taxes.
The good news is that, if you received an EIP in 2020, you will likely still get a refund in 2021. Even though the EIP was treated as an advanced tax refund, it is separate from the taxes you overpaid in 2020. Any refund you’re due in 2021 is still yours.
Anyone who was due an EIP in 2020 but never received it, or only received part of it, will likely qualify for the Recovery Rebate Credit.
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