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June 3, 2020

Navigating Key Provisions of The CARES Act

Please read important disclosures and index definitions HERE

Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides economic relief to individuals and businesses negatively impacted by the coronavirus pandemic. While the bill contains provisions relating to retirement accounts and distributions, it also covers a variety of other provisions beneficial to individuals and small businesses. Some of these other key provisions of the CARES Act include:

1. Tax Rebates

The CARES Act provides for a rebate of up to $1,200 for an individual taxpayer whose adjusted gross income (AGI) is below $75,000 and up to $2,400 for joint filers whose AGI is below $150,000. Qualifying taxpayers with children also receive $500 for each child. To qualify for the maximum rebate amount, a taxpayer cannot be a dependent of another taxpayer and must possess a work-eligible Social Security number. To the extent income exceeds the threshold amounts, the eligible credit is phased out at a rate of $5 for every $100 above the AGI threshold amount . The AGI phaseout for a single person with no children is $99,000 and a married couple with no children is $198,000.

The rebate is considered a 2020 tax credit, but it is being distributed in the form of an advance payment and computed based on AGI reported on one’s 2019 income tax return. If the 2019 tax return has not yet been filed, the credit will be based on 2018 AGI.

2. Tax Deductions for Charitable Giving

a. $300 Above-the-Line Deduction for Those Who Take the Standard Deduction

If a taxpayer takes the standard deduction on their 2020 tax return, the taxpayer can claim an “above the line” deduction of up to $300 for cash donated to public charities. This means that up to $300 can be deducted from a taxpayer’s gross income, which reduces their taxable income. Contributions to donor-advised funds and supporting organizations do not qualify for this charitable deduction.

b. Percentage of AGI Limitation for Charitable Contributions Increased for Those Who Itemize

The CARES Act increases the maximum deduction amount for cash donations made to public charities in 2020 from 60% of AGI to 100% of AGI. Any donations in excess of this limit can be carried over for up to five years. Contributions to donor-advised funds and supporting organizations do not qualify for the deduction. However, individual donors can still deduct up to 60% AGI in cash given to a donor-advised fund and up to 30% AGI in appreciated assets contributed to a charity. Excess deductions can be carried forward for up to five subsequent tax years.

For corporations, the maximum 10% limit was increased to 25% of the corporation’s taxable income.

c. IRA Qualified Charitable Distributions (QCD)/Planning Opportunity

The CARES Act did not change the rules concerning QCDs. Individuals over the age of 70 ½ can donate up to $100,000 annually in IRA assets directly to charities, without including the distribution in taxable income.

Since under the CARES Act an individual can elect to deduct up to 100% of AGI for cash charitable contributions to public charities, individuals over 59 ½ can avail themselves of benefits similar to a QCD. For instance, they can take a cash distribution from their IRA, contribute the cash to a public charity, and completely offset the tax attributable to the distribution by taking a charitable deduction in an amount up to 100% of their AGI for the tax year.

For those between the ages of 59 ½ and 70 ½ who want to make a large donation in 2020, this may be a useful strategy to consider depending on the size of one’s retirement account and other assets.

d. Roth Conversion and Charitable Contributions

Given recent losses in value of assets in traditional IRAs, it may be beneficial to convert some of those assets to a Roth IRA. The income tax due at the time of the conversion is computed on the lower valuation of the assets and an individual gains access to future tax-free growth with no required minimum distributions. Further, under the CARES Act, there is now a 100% AGI limitation for cash gifts to public charities. Converting to a Roth IRA will create additional AGI for the 100% of AGI limit. The amount of the resulting income tax liability on the Roth conversion can be gifted to charity. This technique allows the donor to direct their tax dollars to a more favored cause.

3. Medical Expense Deduction

The CARES Act eliminates the medical expense deduction requirement that says taxpayers can only deduct the amount paid for medicine or drugs pursuant to a prescription. As a reminder, for 2020 federal tax purposes, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceed 7.5% of AGI. The IRS’s list of qualifying medical and dental expenses can be found at: https://www.irs.gov/taxtopics/tc502.

4. Small Business Paycheck Protection Program

Through the Small Business Administration, the CARES Act also established the Paycheck Protection Program, which provides small businesses with funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The funds are distributed as loans via banks participating in the Small Business Administration program. Part or all of the loan amount may be forgiven if used for the specified purposes.

5. Additional CARES Act Tax Savings Opportunities

The CARES Act provides opportunities to potentially amend prior year tax returns to generate cash tax savings in the following situations:

a. Five-year net operating loss (NOL) carryback for losses generated in 2018, 2019, and 2020 tax years;

b. Repeal of the excess business loss limitation for taxable years beginning before January 1, 2021;

c. Application of 50% (versus 30%) of adjusted taxable income limit in computing business interest limitation for 2019 and 2020; and

d. Application of 100% bonus depreciation to qualified improvement property placed in service after 2017.

If you are interested in learning more about these provisions and how they might benefit you, please contact your B|O|S team, your attorney, or your accountant.

Filed under: Estate Planning

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