The past few weeks have been an absolute shock to the system. In response to the recent Coronavirus pandemic, the government has taken swift action to help the American people and stabilize the economy.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act is full of provisions but the one that has sparked the most attention is the recovery rebate. Structured as an income tax rebate (credit), individuals will receive $1,200 (or $2,400 for those filing joint tax returns) plus an additional $500 for each qualifying child (those under age 16 and under).
Because the intent is to put money in the hands of people as quickly as possible, the IRS will be issuing payments electronically based on the direct deposit information on file with the IRS. If none, they'll be mailing out checks.
A few wrinkles. The first is that the rebate begins to phase out based on adjusted gross income: $75,000 for individuals and $150,000 for joint filers. Those earning greater than $99,000 (single) / $198,000 (joint) are completely phased out. The credit isn't available for those that can be claimed as a dependent, estates, trusts, or nonresident aliens.
The other wrinkle is that income is based on the most recent tax return. Therefore, if you've filed 2019, the IRS will use that to compute your rebate. If you haven't yet filed for 2019, the IRS will instead look at 2018. What if you're on the income bubble? Say you're eligible in 2018 but not 2019 and haven't filed? Well, you may want to consider holding off on filing your 2019 return. If you're due a refund for 2019, you'll need to weigh that option against getting your 2019 refund.
Because the rebate is technically an advance on a 2020 tax credit, you're actual credit will be trued up when you file your 2020 tax return. For example, assume you have a child in 2020. You'll get credit for the child when you compute the credit for your 2020 tax returns.
The IRS will have a lot to sort out over the coming weeks and months and eventually for 2020's tax returns so expect more information and specifics later on.
The big takeaway is that individual income tax returns due on April 15, 2020 are now automatically postponed until July 15, 2020. Additionally, payment of tax has been postponed as well. No forms need to be filed nor do you need to call the IRS. You only need to file and pay by the new due date. Planning opportunity: If you're going to receive a refund, consider filing your return as soon as possible and electing direct deposit to safely and quickly receive your money.
For those individuals that pay quarterly estimates, the 2020 first quarter estimate was due on April 15 but has been postponed until July 15. The second quarter payment is still due on June 15, however. Assuming you make quarterly estimates, this means that yes, you'll pay quarter two first on June 15 and then quarter one on July 15. It's strange but the IRS confirmed this in the FAQ.
The good news is that this relief provides additional time to make IRA contributions for 2019. IRA contributions, including Roth, traditional, and SEP, need to be made by the due date of the tax return. Because the relief postpones the due date, this provides additional time to make contributions for last year. The same goes for Health Savings Account (H.S.A.) contributions.
It should be noted that while many states are following suit, it's best to check with your particular state regarding your filing obligations. The AICPA has put together a handy guide - AICPA Coronavirus State Tax Filing Guidance.
Beginning on March 13, 2020, the U.S. Department of Education has suspended interest accrual on certain federally held student loans including Direct Loans, Federal Perkins Loans, and Federal Family Education Loan (FFEL) Program loans for the next 60 days. It's possible that it could be extended depending on the status of the COVID-19 emergency. If you make payments during this time, the full amount will be applied to your outstanding.
Speaking of payments, you may ask for an administrative forbearance. This is not automatic; you'll need to reach out directly to your loan servicer to make the request. Also, the Department of Ed. mentions that automatic payments will not automatically resume. You can head to StudentAid.gov/login to locate your particular servicer.
While the above isn't (and can't be) exhaustive, it's a good starting point. There are relief provisions regarding early distributions from retirement accounts, suspension of required minimum distributions, a new charitable deduction up to $300 even if you don't itemize, and various relief provisions for businesses, I've provided some links below that may be useful to find additional information. As always, if you'd like to discuss, reach out and we'll meet virtually.
Coronavirus Tax Relief - IRS - Check Status of Payments
State Tax Filing Guidance for Coronavirus Pandemic - AICPA https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-state-filing-relief.pdf
Filing and Payment Deadlines Questions and Answers - IRS https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers
Families First Coronavirus Response Act: Questions and Answers - US Dept of Labor
Families First Coronavirus Response Act: Employee Paid Leave Rights - US Dept of Labor
Coronavirus Aid, Relief and Economic Security (CARES) Act - Congress.gov
The above is for general information only. Consult with competent investment, tax, or legal counsel to best understand your unique circumstances before implementing any strategy. There is no assurance that working with a financial professional will improve investment results. The COVID-19 emergency is a fluid situation; all information above is subject to change. Read our firm's disclaimer here: https://www.windingtrailfinancial.com/disclaimer.