The CARES Act: what it means for individual taxpayers.

The COVID-19 pandemic has spurred the most rapid deterioration in the economic environment in modern history, and the federal government has responded in equally historic fashion. 

Last Friday, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law, and its $2.2-trillion price tag indicates the extraordinary level of assistance that our legislators and the administration believe is necessary to keep the American economy afloat during this unprecedented time.

The CARES Act includes loans and tax cuts for large corporations, assistance for small businesses, loans and direct assistance for local governments, expanded unemployment benefits, education spending, and disaster assistance, among other provisions. But it also contains some key assistance for individuals, the most significant of which is the 2020 individual recovery rebate – an “advanced tax credit” that will be direct deposited in many individual’s accounts in the coming weeks or otherwise mailed as a check.

Here is a summary of the key points of the CARES Act that can help individuals weather this uncertain climate.


Brooke Zrno Grisham
Chief Executive Officer of The Nautilus Group®

Breaking down the impacts of the CARES Act.

  • Taxpayers with adjusted gross income (AGI) below certain thresholds are eligible for payments of $1,200 per individual ($2,400 for a married couple), plus an additional $500 for any dependents under the age of 17. Eligible recipients must be U.S. citizens or U.S. resident aliens, may not be claimed as a dependent on another tax return, and must have a valid ID number (generally, a Social Security number). AGI thresholds are as follows:
    • $75,000 individual; $112,500 head of household; and
    • $150,000 married filing jointly.
  • The rebate is phased out by 5% of income above such thresholds (complete phaseout above $99,000 individual, and $198,000 married), and the phaseouts apply to rebates for children, as well.
    • Example: Married couple with 2 children and combined AGI of $180,000. Total rebate amount is $2,400 (couple), plus $1,000 for the children, or $3,400. AGI exceeds threshold by $30,000. 5% of $30,000 is $1,500 reduction in rebate to $1,900.
  • The determination of AGI is by reference to the taxpayer’s 2019 tax return (if filed), otherwise the 2018 tax return. Notably, the rebate is being treated as an "advanced tax credit" reported on the 2020 tax return.
    • For taxpayers who will not be eligible based on ultimately reported 2020 taxable income, but who are eligible for and receive the credit based on 2019 or 2018 income, it is not considered likely at this point that any portion of the tax credit will need to be refunded, or will otherwise increase the taxpayer’s tax liability when 2020 taxes are computed.
    • For taxpayers who are not eligible based on 2019 or 2018 income, but are eligible based on 2020 income, it is anticipated that such credit should be available to reduce the taxpayer’s tax liability when the 2020 return is filed.
    • Taxpayers who are not eligible for the rebate based on 2019 income and have not yet filed their return, but would be eligible based on 2018 income, may consider waiting to file their 2019 return (with current due date extended to July 15, 2020).
  • Note as well that the credit is considered "refundable,", meaning that a taxpayer does not need taxable income to be eligible. As a result, retirees who receive only Social Security and/or tax-free income will be eligible for such payments. 
  • Individuals who have been adversely impacted by COVID-19 have the ability (during 2020) to take a penalty-free distribution of up to $100,000 from qualified defined contribution retirement plans and IRAs. A 10% penalty normally applies to distributions from such plans for participants who are under age 591/2. Of course, for those who continue to be employed, in-service distributions from employer sponsored plans may not be permitted under the plan document. In such instances, a plan loan under expanded terms (as discussed below) may be considered in the alternative.
  • To be considered a “coronavirus-related distribution,” the participant or account owner must:
    • Be diagnosed with SARS-CoV-2 or COVID-19;
    • Have a spouse or dependent diagnosed with such virus; or
    • Experience adverse financial consequences as a result of quarantine, furlough, being laid off, a reduction in work hours, or an inability to work due to lack of child care, business closing or reduced hours.
  • Such distribution may be included in income over a three-year period. Conversely, the distribution may be re- contributed over a three-year period, in which case it is treated as an eligible rollover contribution.
    • As a result, an individual may elect to pay income taxes on the distribution over the next three years, or repay over the same period as essentially an interest-free loan.
    • Tax withholding obligations on such distributions will not apply to plan administrators.
    • As it appears possible to effect complete repayment in the third year, IRS procedures for prior qualified disaster distributions should permit an individual to file an amended return to obtain a refund of tax paid in years 1. or 2.
  • Lastly, the CARES Act includes a provision permitting participants of qualified plans who have likewise been impacted by COVID-19 (as described above) to take up to $100,000 in loans (or up to 100% of the fully vested balance) from such plans, for a period of up to 180 days from March 27, 2020, the date of enactment. This is an increase from the normal loan limit of $50,000 or half of the vested account balance.
    • Additionally, repayment on plan loans for such qualified participants are delayed for one year, with interest accruing on the loans during such period. 
  • As was provided in 2009 during the last recession amid the financial crisis, required minimum distributions from qualified plans and IRAs (though not defined benefit plans) are waived for 2020. A waiver is helpful for many retirees whose plan balances have been battered by the severe correction in financial markets, where they would otherwise be required to take a taxable distribution at potentially depressed values. Any rebound in markets could then accrue to the participant on a tax-deferred basis.  Furthermore, it appears that individuals who’s first RMD arose in 2019 and has been deferred to April 1st of this year may be able to waive the 2019 RMD, as well as the 2020 RMD.
  • Charitable deduction rules for individual taxpayers have been modified as well, to encourage those able to consider charitable giving during this tumultuous period, as well as to enable donors to benefit from increased generosity. Specifically:
    • The AGI limit to deduct cash contributions to public charities has increased from 60% under current law to 100% for 2020.
    • For taxpayers who do not itemize deductions (where charitable contributions are otherwise claimed), a $300 above the line deduction will be available for cash contributions to most public charities (though not private foundations or donor advised funds). As a result, relatively small charitable gifts will effectively increase the amount of the available standard deduction. This provision is effective in 2020 but continues indefinitely. 
  • The CARES 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 December 31, 2020.

  • Lastly, certain student loan repayment obligations under the Federal Family Education Loan (FFEL) Program and Ford Federal Direct Loan (Direct Loan) Program have been suspended until September 30, 2020, with no accrual of interest required. 

You can see from this general overview of the economic relief provisions of the newly enacted CARES Act that there is something here for virtually everyone.  However, many rules and limits apply, so as with any situation that impacts your family’s security or your business’s longevity, you should always consult with your own financial advisors to make sure the road you take to economic recovery is the right one for you.

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Brooke Zrno Grisham, ChFC®, CLU®, AEP®, is the Chief Executive Officer of The Nautilus Group®, a service of New York Life that provides exclusive support to high net worth individuals and closely held business owners in the areas of estate, insurance, retirement and business exit planning, income tax strategies, planning for families with special needs individuals, and charitable giving. 

This material includes a discussion of one or more tax-related topics and was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purposes of avoiding any IRS penalties that may be imposed upon the taxpayer. Nautilus, New York Life Insurance Company, its employees or agents are not in the business of providing tax, legal or accounting advice. Individuals should consult with their own tax, legal or accounting advisors before implementing any planning strategies. © 2020 New York Life Insurance Company. All rights reserved.