April 01, 2020 2020 CARES Act – Tax Impact on Individuals
KEEPING YOU INFORMED…
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). This legislation liberalizes certain retirement plan and charitable contribution deduction rules regarding individuals for 2020.
Waiver of Required Minimum Distribution Rules
An individual is usually required to begin taking minimum distributions from his or her retirement plan (other than a defined benefit plan) or IRA no later than April 1 of the year after the year the individual attains age 72. However, the CARES Act waives the required minimum distribution rules for 2020 so no distribution is required for this year.
Waiver of Early Withdrawal Penalty for Certain Withdrawals from Qualified Retirement Plans
Under the CARES Act, the 10% penalty for withdrawal by an individual prior to age 59½ from qualified retirement accounts and IRAs is waived for distributions of up to $100,000 for “coronavirus-related purposes.” An individual may elect to include the entire distribution in his or her income in 2020 or ratably over a 3 year period (i.e., 2020, 2021 and 2022).
Alternatively, an individual may elect to repay the distribution to his or her retirement plan or IRA within a 3 year period. In such case, the amount repaid would be treated as a rollover contribution and would not be included in income. Furthermore, the amount repaid would not affect the individual’s contribution limit that is applicable at the beginning of the year of repayment.
A distribution is coronavirus-related if made to an individual: (a) who is diagnosed with COVID-19; (b) whose spouse or dependent is diagnosed with COVID-19; or (c) who experiences
adverse financial consequences due to being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of childcare as a result of COVID-19, closing or reducing hours of a business because of COVID-19, or other factors determined by the Treasury.
Increase in Limit on Loans from Qualified Employer Plans
The CARES Act increases the limit on loans which an individual may take from a qualified retirement plan from the lesser of $50,000 or 50% of the participant’s accrued benefit to the lesser of $100,000 or 100% of the participant’s accrued benefit. The increased loan limit will apply for a 180-day period beginning on the date of the enactment of the CARES Act (i.e., March 27, 2020).
Delay in Loan Repayment
Under the CARES Act, the repayment date for outstanding loans from qualified plans made to qualified individuals which were otherwise due between March 27, 2020 and December 31, 2020 are delayed for one year.
Changes to Charitable Deduction Rules
The CARES Act provides that, for 2020, an individual may deduct charitable contributions in cash of up to $300, regardless of whether that individual itemizes his or her deductions.
Furthermore, the deduction limit on the amount of cash contributions an individual who itemizes deductions may claim for 2020 is suspended. Therefore, an individual may take a charitable contribution deduction of up to 100% (instead of 60%) of his or her adjusted gross income.
The aforementioned charitable deduction rules do not apply to contributions made to donor advised funds or to certain non-operating private foundations.
If you have questions regarding the contents of this memorandum or any issues that may arise as a result of this new legislation, please contact Jeff Zankel, Steve Godsberg, Diane Moffet or one our other attorneys at the direct dial number or email address indicated on the contact information page attached to this memo.
THIS MEMORANDUM IS MEANT TO ASSIST IN GENERAL UNDERSTANDING OF THE CURRENT LAW. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.
© Lamb & Barnosky, LLP 2020