Impact of Recent Legislation on your Taxes
I must start by hoping that as you read this, you and your loved ones are in good health and remain in good spirits during what has been a very difficult time for all of us here at home, throughout our country, and the world.
Over the course of the last two weeks Congress has been busy enacting legislation to deal with the effect of the corona virus on our lives and our economy. Many may not understand how, or if, these provisions impact them. This is an unusually long newsletter, and I apologize for that, but much has happened. I have tried to be as brief as possible, but wanted to include as many of the tax provisions that may impact you.
TAX FILING AND PAYING
We are familiar with the fact that the tax filing deadline for the individual income tax return is April 15. The filing and payment deadlines have been extended until July 15, 2020. These extensions are automatic and taxpayers do not need to do or file anything to request the extension. This relief is available to individuals, corporations, estates and trusts and non-corporate tax filers regardless of the amount of tax due. The relief extends to self-employed individuals and estimated income tax payments which would be due on April 15, 2020. Regular interest and penalties will begin to accrue on unpaid tax liabilities on July 16, 2020.
If you cannot file your return by July 15, 2020 you can still request an extension of time to file until October 15, 2020 by filing IRS Form 4868. Filing this extension does not extend the time to pay any taxes which might be due. The deadline to make payments without interest or penalty is July 15, 2020.
If you are due a refund the IRS recommends that you file your return as soon as possible. Although many IRS offices are closed, the IRS is processing returns and issuing refunds. At this time most refunds are being issued within 21 days of filing.
HIGH DEDUCTIBLE HEALTH PLANS
The IRS has announced that high-deductible health plans (HDHP) can pay for COVID-19 related testing and treatment before plan deductibles are met without jeopardizing the status of the plan. Vaccination costs can also be paid by the HDHP as preventive care. Individuals who have an HDHP plan which covers these costs may continue to contribute to their health savings account (HSA). If you have a medical plan which is not an HSA eligible HDHP, such as an employer plan, you will have to contact the plan’s administrator with questions about COVID-19 coverage.
FAMILIES FIRST CORONA VIRUS
The Act, signed on March 18, provides for refundable payroll credits to cover the cost to an employer of providing COVID-19 related leave to their employees. The Act applies to businesses that have fewer than 500 employees. Specifically, the Act provides the following:
Paid Sick Leave
Employees of eligible employers can receive up to 80 hours of paid sick leave at 100% of their pay if unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms and is seeking a medical diagnosis.
Employees who are unable to work because of a need to care for an individual who is quarantined, to care for a child whose school is closed or whose care provider is unavailable for COVID-19 related reasons, or the employee is experiencing certain conditions can receive up to 80 hours of paid sick leave at 2/3 of the employee’s pay.
An employee who is unable to work due to the need to care for a child may, under certain circumstances, receive up to an additional ten weeks of paid family and medical leave at 2/3 of the employee’s pay.
Employer Reimbursement for the Employee’s Paid Sick Leave
If an employee is unable to work because of quarantine (including self-quarantine) or because of COVID-19 symptoms and is seeking a medical diagnosis, the eligible employer may receive a refundable sick leave credit at the employee’s regular rate of pay, up to $511 per day and $5,110 in total, for a total of 10 days.
If an employee is caring for someone with the virus or is caring for a child whose school/child care facility is closed or whose care provider is unavailable due to COVID-19 the employer may claim a credit of 2/3 of the employee’s regular rate of pay, up to $200 per day and $2,000 in total, for up to 10 days.
The above limits were imposed by the CARES Act discussed below.
An employer is required to withhold from an employee’s salary federal income taxes and the employee’s share of social security and medicare taxes. The employer contributes its share of social security and medicare taxes. These two amounts combined constitute the employer’s payroll tax obligation. An eligible employer who pays qualifying sick or child care leave to an employee will retain an amount of the payroll taxes equal to the amount of leave paid rather than pay the payroll taxes to the IRS.
If the payroll tax funds are not sufficient to cover the cost of the employee’s leave, the employer can request an advance from the IRS by submitting a claim which the IRS expects to process in two weeks or less. The claim form and the procedure for making the claim are expected to be issued within the coming week. Employers will be able to claim these credits for qualifying leave provided from April 1, 2020 to December 31, 2020.
A self-employed individual who is facing the same circumstances, i.e. unable to work due to COVID-19 or who is caring for a child, will also be entitled to claim the credit. The credits will be claimed on the income tax return and will reduce the estimated tax payments.
Child Care Leave Credit
In addition to the sick leave credit for an employee who is unable to work because of the need to care for a child whose school/care facility is closed/unavailable due to COVID-19, an eligible employer may also receive a refundable child care leave credit. This credit is equal to 2/3 of the employee’s regular pay, up to $200 per day or $10,000 in aggregate. Up to ten weeks can be counted towards child care leave credit.
Employers are entitled to an additional credit based on the cost of maintaining health insurance coverage for the employee during the leave period.
An employer with fewer than 50 employees is eligible for an exemption from the requirement to provide leave for child care when the child’s school is closed or health care is unavailable if the viability of the business is threatened. The Department of Labor will provide guidance and rules for making the determination as to whether a business is exempt from the requirements to provide leave.
Compliance with Act
The Department of Labor will be issuing a non-enforcement policy that provides employers a 30-day period of time to come into compliance with the Act. No enforcement actions will be brought against an employer who fails to comply with the Act so long as the employer has acted reasonably and in good faith to comply with the Act.
THE CARES ACT
This Act became law on March 27, 2020. The Act contains many provisions providing relief and assistance to small and large businesses, hospitals, the medical industry, and agricultural concerns. It also provides for an extended unemployment insurance program. While all its provisions are important, this writing will be limited to the tax provisions of the Act applicable to individuals and the much anticipated “stimulus” to “all Americans”.
Possibly no provision of the Act has generated as much interest as the stimulus payment, and many are anxiously awaiting their $1,200 check. There are some requirements to qualify for the stimulus payment:
- Nonresident aliens, estates and trusts do not qualify for the payment.
- Cannot be an individual with respect to whom a dependency deduction is available to another taxpayer.
- All persons included on a return (spouses and children) must have included a social security number on the return. Other IRS issued numbers such as ITINs do not qualify. The only exception to the social security number requirement is the adoption taxpayer identification number for an adopted person included in the return.
The law is really providing a refundable credit against the 2020 income tax and is using the 2019 or 2018 AGI to determine the amount of the advance (stimulus payment). The amount of the credit is $1,200 ($2,400 for joint filers). There is also a $500 credit for children under 17. The amount of the stimulus payment is reduced by 5% of the amount of adjusted gross income which exceeds $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers. That is, without taking into account the $500 per child credit, the $1,200/$2,400 stimulus payment is completely phased out when adjusted gross income reaches $99,000 for single filers, $136,500 for heads of household or $198,000 for joint returns.
No interest will be paid on the stimulus payment. The stimulus payment is only available until December 31, 2020. The stimulus payment is not considered income for cbankruptcy purposes, nor is it subject to reduction or offset under the Treasury Offset Program except for child support judgments.
To address the most asked question about the stimulus payment: AS OF THIS WRITING, THE IRS DOES NOT HAVE ANY INFORMATION AVAILABLE YET REGARDING THE STIMULUS PAYMENT CHECKS
There are many other provisions in this Act applicable to individuals. The following are brief descriptions and the general terms of most of these provisions. It is impossible to go into the provisions in depth as I have surpassed all reasonable limits on a newsletter!
The 10% early withdrawal penalty is waived for up to $100,000 of withdrawals from retirement funds for COVID-19 related purposes. The withdrawal is still subject to income tax, but the taxpayer can avoid the tax by paying the monies back within three years beginning on the date the distribution was received. If the funds will not be returned to the plan, the taxpayer can elect to report the withdrawn funds ratably over a three-year period thereby spreading the income tax liability over three years.
Required Minimum Distributions
The required minimum distributions from IRAs and 401(k) plans are suspended for 2020. This includes inherited IRAs and the distributions for those that turned 70.5 during 2019 and did not qualify for the new provisions extending the beginning age to 72.
The loan limit from 401(k)s is increased from $50,000 to $100,000 for loans made during the 180-day period subsequent to the enactment of the Act.
A taxpayer may deduct up to $300 in charitable contributions without having to itemize deductions. This applies to tax years beginning on January 1, 2020. During 2020 the limitation on charitable contributions is modified.
I was told recently that there is power in numbers. Let’s continue to practice social distancing and doing our part in taking all recommended steps to fight the corona virus outbreak. If each of us does our part, our collective effort will translate into the power to make a difference.