COVID-19 Tax Relief for Individuals
If you’re a resident of planet Earth right now, chances are you’ve been negatively affected by the coronavirus disease 2019 (COVID-19). Many people are struggling right now – for answers, for help, and for relief. In an attempt to spread awareness, we’ve compiled a broad overview on how the U.S. government is trying to assist individuals through this COVID-19 pandemic from a tax perspective (with a few important non-tax items sprinkled in).
Tax Return Filing and Payment Due Date
For an individual taxpayer with a federal income tax return or a federal income tax payment due on April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed.
For state income tax return filings and payments, your mileage may vary. For example, Hawaii has automatically postponed the filing of 2019 Hawaii income tax returns and related balances due with those returns from April 20, 2020 to July 20, 2020. However, Hawaii has not postponed the due date for first quarter estimated tax payments for tax year 2020 – such payments are still due by April 20, 2020.
Eligible individuals are entitled to a one-time ‘stimulus payment’ of up to $1,200, which the IRS will be paying out as soon as administratively possible. This payment is technically a prepayment of a 2020 refundable income tax credit, which is phased out at the following adjusted gross income levels:
· For a single taxpayer, phase out starts at $75,000 and gets fully phased out at $99,000.
· For married filing joint taxpayers, phase out starts at $150,000 and gets fully phased out at $198,000.
· For a head of household taxpayer, phase out starts at $112,500 and gets fully phased out at $136,500.
Eligibility will be based upon a taxpayer’s 2019 federal income tax return. If a 2019 federal income tax return has not yet been filed, eligibility will be based upon a taxpayer’s 2018 federal income tax return. If you have not yet filed a 2018 or 2019 federal income tax return, you may consider trying to file as soon as possible in order to expedite receipt of your payment.
A couple filing jointly would receive a payment of up to $2,400 (or $1,200 each person). Up to an additional $500 would be included for each qualifying child (under the age of 17) of a taxpayer.
This prepaid tax credit will be reconciled on taxpayers’ 2020 federal income tax returns. If you have not received a payment but were entitled to one, you would be able claim the tax credit on your 2020 federal income tax return. It currently seems that overpayments of a prepaid tax credit as a result of higher 2020 income would not be clawed back by the IRS.
If you want to calculate the amount of prepaid tax credit you will be receiving, there are ‘stimulus check’ calculators already popping up online, such as this one from Kiplinger.
Individuals eligible to collect unemployment in their state would get an additional $600 per week in federally-funded unemployment benefits, for up to four months. In addition, unemployment benefits will be extended by an additional 13 weeks beyond regular state benefits.
Note that unemployment benefits are federally taxable and are taxable in many states as well. Individuals receiving unemployment benefits should be prepared for the tax effects of any unemployment benefits they are receiving.
Paid Sick Leave
Eligible employees affected by COVID-19 will be entitled to two weeks of paid sick leave at their full regular salary, up to $511 per day. Eligible employees affected by COVID-19 are also allowed up to twelve weeks of paid family and medical leave at two-thirds their regular salary, up to $200 per day.
Student Loan Deferral
Student loan payments for federally-held loans will be automatically suspended through September 30, 2020. Interest will not accrue on student loans during this period. The suspended payments will count as a payment for those participating in a student loan forgiveness program.
Access to Retirement Plan Funds
Obstacles preventing access to retirement funds have been laxed for those adversely affected by COVID-19. Normally, early distributions from a retirement account would incur a 10% penalty. This 10% penalty is waived for any qualified COVID-19-related distributions (up to $100,000).
Retirement distributions would still be included as part of taxable income. However, qualifying distributions are generally spread out and included as part of taxable income over a span of three years, instead of included as part of taxable income all in the year of the distribution. This would help spread out the tax consequences of the COVID-19-related distributions.
Limits on loans from employer-sponsored retirement plans have also been laxed for affected individuals. Previously, loans from such retirement plans were limited to the lesser of 50% of the account balance or $50,000. This has been temporarily increased to 100% of the account balance or $100,000.
Repayments on loans from an employer-sponsored retirement plan for affected individuals have been deferred as well.
Required Minimum Distributions
The required minimum distribution (RMD) from certain retirement plans for those who are of age has been suspended for 2020. If you have not yet taken your RMD for 2020, you are no longer required to do so. RMD requirements will be reinstated for 2021.
Starting in 2020, an individual may claim an ‘above-the-line’ deduction for charitable contributions of up to $300. This allows individuals who normally do not itemize their deductions to get a tax benefit from charitable contributions.
Again, the above is meant to be a resource for individuals to gain awareness of relief that is being made available by the government. There are many technical details for each of the above items that are not covered above. If you would like to discuss any of the above items in more detail, please feel free to reach out to us via phone or e-mail.