Tuesday, March 31, 2020

Direct Payments and Charitable Deductions from the Recent CARES Act

Pathways Advisory Group, Inc.
Evon Mendrin, CFP®

To help millions of Americans affected by the novel coronavirus, Congress passed – and the President signed – The CARES Act. Earning a solid 10-out-of-10 on the Catchy Law-Name Scale (our government cares!), the legislation provides over 2 Trillion dollars in aid.

This is Part One of multiple articles on the bill. Let’s dig in and take a look at what individuals and families can expect.

Recovery Rebates - Direct Payments to Individuals and Families

Likely the provision receiving the most interest, the CARES act provides Recovery Rebates – direct payments to the American public.

Married couples filing taxes jointly can receive up to $2,400 and all other tax filers can expect up to $1,200. Families will also receive up to $500 per qualifying child – that is, dependent children under age 17.

The payments come with phaseouts if your Adjusted Gross Income (AGI) is above certain thresholds. Payments will be reduced by 5% for every dollar over the following AGI thresholds:
  • Married Filing Jointly: $150,000
  • Head of Household: $112,500
  • Single/All other filers: $75,000
A few examples:

Jim and Jessica are married with three kids under 17. Their AGI is $160,000. Their potential rebate payment is $3,900 ($2,400 + $500 + $500 + $500). But their AGI is above the threshold by $10,000. So, their actual Rebate payment is $3,400. ($3,900 – ($10,000*5%)).

Jamie is single with one 15-year-old daughter. Her AGI is $50,000. She’s under the $75,000 AGI threshold, so her Rebate payment will be $1,700 ($1,200 + $500).
A single taxpayer with an AGI of $99,000+ ($198,000 for married filing jointly) is phased out and not eligible for the payment. However, if under the thresholds, then you can expect the full payment.

What year’s income is this based on? Here’s where it gets interesting. The payment is technically a refundable tax credit. The credit is for 2020 income but is an advance on that credit.

The 2019 tax return will be used to verify income and family status. If the 2019 tax return is not yet filed, the 2018 tax return will be used. When the 2020 tax return is filed, any extra amount you are eligible to receive will be sorted out in the form of a tax credit.

How will payments be delivered? It depends. Payments will be made electronically directly to bank accounts the IRS has on file for 2019 (or, if not filed, 2018) refund deposits. Those receiving Social Security will receive it in the same account they receive Social Security. It appears all other payments will be sent by check to the last known address on file.

The IRS announced it will create a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.

When will payments be delivered? The bill requires they be sent as “as rapidly as possible,” and Treasury Secretary Steven Mnuchin mentioned a 3-week goal for those with direct deposit information. The IRS announced on March 30th that distributions will begin within the next three weeks. It is unclear whether those receiving paper checks will fall within this window.

What if I don’t receive my payment? The law requires that a notice is to be mailed to your last known address within 15 days after payment is sent. The notice will indicate how the payment was made, the amount, and a phone number to the IRS to report if you haven’t received it.

There are several points to consider and some uncertainty here. Due to the tax filing deadline being pushed back to July, it’s likely many Americans will not have filed 2019 tax returns. If not, 2018 income will be checked for this payment eligibility. Some odd situations can arise from this.

Because many may have not filed 2019, the payments received now may not reflect the reality of their lives. Many life changes could have happened after 2018. Marriages, divorces, children born, kids turning 17. All of this could change the potential payment received.

For example, someone who got married and had one child after 2018 could potentially have a $1,700 higher payment as a family. If the 2019 return is not filed, these changes aren’t seen by the IRS.

Income may also have dramatically changed between 2018, 2019, and even 2020! It’s possible 2018 income is too high to qualify for the payment. If the 2019 return hasn’t been filed, that higher income is used to verify eligibility.

It’s also likely many people will have dramatically lower income in 2020, even in light of higher income before. You won’t have a chance to benefit from the Rebate until the 2020 tax return is filed and your correct credit is calculated.

This can also work in someone’s favor. If your income is too high in 2019 (and 2020), but you haven’t filed the 2019 tax return, you may be eligible for the payment based on low 2018 income. At least one Senator’s FAQs page says excess amounts will not have to be paid back if the 2020 tax return is filed and it shows you were not eligible based strictly on your 2020 return.

So, what to do? Take a careful look at your 2018 & 2019 tax information and any life changes between those years. Talking with your tax professional makes sense in this situation. It may make sense to file 2019 tax returns so the IRS takes changes into account. It’s not clear when it’s too late to file for payment eligibility - or if it’s already too late.

What if you haven’t been required to file tax returns? In this case, the IRS will provide directions to file a 2019 tax return “with simple, but necessary, information” for the Rebate payments.

Check out the latest IRS information here on the Rebate payments.

New $300 Above-the-Line Deduction for Qualified Charitable Contributions

Congress created a new above-the-line deduction for qualified charitable contributions of up to $300. While it’s not a substantial amount, most taxpayers should be able to benefit. In order to take the deduction, a taxpayer cannot itemize deductions on their Federal return.

The donations must be in cash or check, and they specifically can’t fund either donor advised funds (DAFs) or 509(a)3 “supporting organizations.”

This comes after the Tax Cuts and Jobs Act eliminated some above-the-line deductions and increased the standard deduction. Many taxpayers no longer itemize deductions and don’t take advantage of itemizing charitable contributions.

Interestingly, the text of the law seems to indicate this is an ongoing deduction, stating it “shall apply to taxable years beginning after December 31, 2019.” It’s likely we’ll see additional guidance on the length of time.

AGI Limit for Cash Charitable Contributions Temporarily Repealed

The current limit for cash contributions to charity is 60% of AGI. The CARES Act increases this temporarily to 100% of AGI for “qualified” contributions, which means you can wipe out your 2020 tax liability with proper donations to charity. If total donations exceed the 2020 100% limit, the excess can be carried forward to future tax years for up to 5 years.

The same exclusions to DAFs and 509(a)3 organizations apply.

This should, hopefully, provide some incentive for those with means to donate to charities that might otherwise see large declines in donations.

As always, chat with your tax professional to determine how these provisions affect your tax situation. Stay tuned for our next article, looking at how the law affects your retirement accounts!

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