The CARES Act: Key Tax Law Changes

From rebates to retirement fund withdrawals to deducting business losses, learn about important changes to tax laws made by the Coronavirus Aid, Relief, and Economic Security Act.

By , J.D.

In an effort to provide relief to Americans suffering economic dislocation due to the coronavirus (COVID-19) pandemic, Congress has enacted the Coronavirus Aid Relief and Economic Security Act (CARES Act). The CARES Act contains several important changes to the tax laws intended to help boost the flailing economy.

Tax Rebates

The most highly publicized element of the CARES Act is the immediate payment of a tax rebate of up to $1,200 to each American. The full rebate is $1,200 for single adults and $2,400 for married couples filing jointly. The rebate is $500 for children under age 17. The rebate is not limited to those who pay or owe taxes or file tax returns.

The rebate is phased out for higher income individuals—singles with income over $75,000 and married couples with joint income over $150,000. The rebate is reduced $5 for every $100 income exceeds these thresholds. Thus, singles with income over $99,000 get no rebate; married couples with income over $198,000 get no rebate. The phase-out is based on the 2019 income shown in your filed tax return. If you haven't filed a return for 2019, your 2018 return is used. You don't have to file any form to get this rebate. It will be automatically deposited in your bank or account or a check will be mailed to you. It should take about three weeks to get the money.

For people who are not on Social Security and do not file tax returns -- because they don't make enough money or are homeless, recently incarcerated, or otherwise not on file with the IRS, the IRS has created a Non-Filers page on its website where you can create an account so that you get your rebate.

To find out exactly how much money you will receive and how it works, see Nolo's article, Stimulus Check Calculator: How Much Will Your Coronavirus Payment Be?

Using Retirement Funds for Coronavirus Expenses

If you have a tax qualified retirement plan such as an IRA or a 401(k), you ordinarily have to pay a 10% penalty if you take the money out before you reach age 59.5—this is on top of paying ordinary income tax on the withdrawal. The CARES Act permits you to take a "coronavirus-related distribution" of up to $100,000 in 2020 without paying the penalty. You can take such a penalty-free distribution if:

  • you, your spouse, or a dependent are diagnosed with SRS-COV-2 or COVID-19, or
  • you experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of child care.

You don't have to provide a doctor's note or other proof to your plan administrator—a certification made by you is sufficient.

You must still pay regular income tax on such a distribution, but you have three years to do so, beginning with 2020. Moreover, you don't have to pay any tax at all on the distribution if you repay the amount to your retirement plan within three years after receiving it.

Instead of withdrawing money from your retirement plan, you can borrow it. When you do so, you must pay it back. There is an annual limit on how much you can borrow. The CARES Act has increased this amount from $50,000 to $100,000 for the next six months.

Delay in Required Minimum Distributions from Retirement Plans

Each year, individuals who are over 72 years of age must take required minimum distributions (RMDs) from their defined contribution plans, like 401(k)s, 403(b)s, 457(b) plans, and IRAs. Failure to do so results in a substantial penalty. The CARES Act suspends such RMDs for one year. In other words, you can delay taking your RMD until 2021. The one-year delay applies to both 2019 RMDs that needed to be taken by April 1, 2020 and 2020 RMDs. This can avoid having to take money out of retirement accounts that have substantially gone down in value due to the coronavirus economic downturn.

$300 "Above the Line" Charitable Contribution Deduction

Nonprofits are really hurting right now, with a big decline in contributions. One problem with getting people to make such contributions is that most taxpayers can't deduct them. You have to itemize your personal deductions on IRS Schedule A to deduct such contributions and only about 8% of taxpayers do so. So, 92% of taxpayers get no deduction for their contributions. The CARES Act ameliorates this problem by allowing taxpayers to deduct up to $300 in charitable contributions without itemizing. This is an "above the line" deduction that reduces your adjusted gross income. The contributions must be made in cash to 501(c)(3) public charities. This change in the law is permanent—it applies to 2020 and all future years.

For wealthier taxpayers who do itemize their personal deductions, the CARES Act increases the annual income limits on deducting charitable contributions. For 2020 only, taxpayers can deduct charitable contributions up to 100% of their adjusted gross income, increased from 50% of AGI. Corporate taxpayers may deduct up 25% of adjusted taxable income, increased from 10%.

Employer Payment of Student Loan Debt

The CARES Act allows employers to pay up to $5,250 of an employee's 2020 student loan payments. Such payments are tax-free to the employee. If your employer makes such payments on your behalf, you can't deduct the interest on such loans.

Delayed Payment of Self-Employment Taxes

If you're self-employed, you must pay a 12.4% Social Security tax on up to $137,700 in net self-employment income for 2020. You ordinarily pay this tax as part of your quarterly estimated tax payments to the IRS. The CARES Act allows you to defer 50% of your Social Security taxes until the end of 2021 and 2022. If you choose to do this, you must pay 25% of the deferred amount by December 31, 2021 and 25% by December 31, 2022.

Deducting Business Losses

The CARES Act makes it much easier for business that lose money to deduct their losses. It reverses restrictions that went into effect in 2018 as part of the Tax Cuts and Jobs Act (TCJA). Net operating losses (NOLs) occurring during 2018, 2019, and 2020 may be used to offset 100% of other nonbusiness income earned during those years, rather than just 80% under the TCJA. In addition, NOLs incurred during 2018 through 2020 can be carried back five years to reduce taxes paid in those years. This can result in a quick tax refund from the IRS, a huge help in this time of economic stress.

The CARES Act eliminates another restriction imposed by the TCJA. The TCJA limited annual deductions of "excess business losses" by individual business owners during 2018 through 2025 to no more than $510,000 for married couples and $255,000 for singles. The CARES Act has completely eliminated this limitation for losses incurred during 2018 through 2020. Thus, taxpayers with very large losses in any of these years can deduct them in full. To learn more about deducting business losses, see Nolo's article, Deducting Business Losses Related to the Coronavirus Outbreak.

Deducting Improvements to Commercial Buildings

When Congress enacted the TCJA in 2017, it intended to help owners or renters of commercial buildings to quickly deduct interior improvements by allowing 100% bonus depreciation for such improvements and a shorter 15-year recovery period for depreciation. Due to a drafting error, this change was never made. The CARES Act fixes this error, retroactive to January 1, 2018. This change should be particularly helpful for the restaurant industry which has been hard hit by the coronavirus pandemic. For example, if you own a restaurant and you paid to remodel the interior in 2018 or 2019, you can file an amended return and fully deduct your costs, resulting in a tax refund from the IRS.

Interest Expense Deduction

Prior to 2018, businesses could deduct all the interest they paid without limit. However, starting in 2018, the TCJA allowed all businesses with average gross receipts of $25 million to deduct interest payments only up to 30% of their adjusted taxable income. The CARES Act increases this amount to 50% for 2019 and 2020.

Tax Help for Employers

The CARES Act also contains a complex employee retention credit designed to help employers who keep paying their employees even though their business is closed or sales have declined by more than 50%. This is a one-year only credit of up to $10,000 per employee paid against the employer's 6.2% share of Social Security payroll taxes. The credit is refundable--employers who owe no taxes can still get the full amount.

Employers may also defer the employer's share of 2020 Social Security payroll taxes (6.2% up to the annual ceiling) until 2021 and 2022.

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