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Last updated: 11 Jan 2021
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The Coronavirus Aid, Relief, and Economic Security (CARES) Act

The CARES Act enacted by the US Congress on 27 March 2020 is an emergency package in response to the COVID-19 pandemic. The Act introduces a number of provisions to aid Americans and the US economy. We've highlighted a few key provisions affecting US individual taxpayers below.
Recovery rebates

Recovery rebates 

Certain US taxpayers (including those living outside the US) are eligible to receive advanced tax credit rebates (Economic Impact Payments of up to $1,200 ($2,400 for joint filers)), plus an additional $500 for each dependent child. The payments are phased out for individuals whose adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers) and is completely phased out once AGI reaches $99,000 ($198,000 for joint filers and $146,500 for head of household filers). 

The eligibility criteria was tested against 2019 Federal tax returns (if already filed), otherwise the IRS tested against 2018 Federal tax returns.

The payment was calculated and sent automatically by the IRS to eligible individuals, and will be deposited into the same account taxpayers had listed on their tax return. Individuals who do not file tax returns but receive Social Security benefits should have received the payment automatically by direct deposit.

For eligible individuals that did not receive the payment, the due date for registering has now passed.

Recovery rebates – second round

A second stimulus payment was signed into law in December 2020 outside of the CARES Act. The IRS and the Treasury Department began issuing the second payments, worth up to $600 per individual, on 29 December 2020. The eligibility criteria remains the same as the first round of payments, with the exception that the income thresholds are tested against 2020 income rather than prior years. The IRS has a deadline of 15 January 2021 for issuing all payments, either by direct deposit, cheque or prepaid debit cards so they are included on taxpayers 2020 tax returns. No action is required by individuals to claim the second payment.

Both Economic Impact Payments are advance payments of a 2020 tax credit. When taxpayers file their 2020 Federal tax return, they will calculate the allowable credit based on their 2020 AGI. If individuals are entitled to an additional credit, as their AGI has fallen or they didn’t register in time for or receive the first payment, they will receive a credit on their 2020 tax return. If a taxpayer’s AGI increases such that it exceeds the above thresholds, there is no claw back of any overpayment.

Individuals can use the IRS web portal here to check the status of their first and second economic impact payments online here: Get My Payment | Internal Revenue Service

For taxpayers who do not ordinarily claim the Foreign Earned Income Exclusions or Foreign Housing Exclusion, to exclude up to a certain amount of foreign earnings from US tax, there might be a benefit from claiming the exclusion in 2020 as the tax refund is based on their AGI, which is gross income after the exclusions have been deducted.

About the author

Paul Baker

+44 (0)20 7556 1391
bakerp@Buzzacott.co.uk
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Recovery rebates 

Certain US taxpayers (including those living outside the US) are eligible to receive advanced tax credit rebates (Economic Impact Payments of up to $1,200 ($2,400 for joint filers)), plus an additional $500 for each dependent child. The payments are phased out for individuals whose adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers) and is completely phased out once AGI reaches $99,000 ($198,000 for joint filers and $146,500 for head of household filers). 

The eligibility criteria was tested against 2019 Federal tax returns (if already filed), otherwise the IRS tested against 2018 Federal tax returns.

The payment was calculated and sent automatically by the IRS to eligible individuals, and will be deposited into the same account taxpayers had listed on their tax return. Individuals who do not file tax returns but receive Social Security benefits should have received the payment automatically by direct deposit.

For eligible individuals that did not receive the payment, the due date for registering has now passed.

Recovery rebates – second round

A second stimulus payment was signed into law in December 2020 outside of the CARES Act. The IRS and the Treasury Department began issuing the second payments, worth up to $600 per individual, on 29 December 2020. The eligibility criteria remains the same as the first round of payments, with the exception that the income thresholds are tested against 2020 income rather than prior years. The IRS has a deadline of 15 January 2021 for issuing all payments, either by direct deposit, cheque or prepaid debit cards so they are included on taxpayers 2020 tax returns. No action is required by individuals to claim the second payment.

Both Economic Impact Payments are advance payments of a 2020 tax credit. When taxpayers file their 2020 Federal tax return, they will calculate the allowable credit based on their 2020 AGI. If individuals are entitled to an additional credit, as their AGI has fallen or they didn’t register in time for or receive the first payment, they will receive a credit on their 2020 tax return. If a taxpayer’s AGI increases such that it exceeds the above thresholds, there is no claw back of any overpayment.

Individuals can use the IRS web portal here to check the status of their first and second economic impact payments online here: Get My Payment | Internal Revenue Service

For taxpayers who do not ordinarily claim the Foreign Earned Income Exclusions or Foreign Housing Exclusion, to exclude up to a certain amount of foreign earnings from US tax, there might be a benefit from claiming the exclusion in 2020 as the tax refund is based on their AGI, which is gross income after the exclusions have been deducted.

Retirement funds

Retirement funds

Individuals who have been affected by COVID-19 are able to take distributions of up to $100,000 from certain retirement accounts (401(a), 401(k), 403(a), 403(b), 457(b) plans and IRAs) during calendar year 2020. Eligible individuals include:

  1. individuals diagnosed with COVID-19; or
  2. individuals whose spouse or dependants have been diagnosed with COVID-19; or
  3. individuals that have experienced financial consequences as a result of being quarantined, laid off, furloughed, having work hours reduced, or not being able to work due to unavailable child care.

Distributions are not subject to withholding or the 10% early distribution penalty. Income tax on the distribution can be spread over a three-year period or individuals can repay the contributions over a three-year period.

In addition, the required minimum distribution rules will be waived for individuals who would ordinarily be required to receive such distributions during 2020 (generally individuals who turn 72 after 1 January 2020). This applies in respect of the same aforementioned retirement accounts.

Charitable contributions

Charitable contributions

Taxpayers can deduct up to $300 of charitable contributions from their taxable income in 2020, regardless of whether they claim itemised deductions. Excess charitable contributions carried forward from previous years are not eligible for this deduction.

The charitable contribution limitations have been suspended for calendar year 2020. Traditionally, individuals who claimed itemised deductions could only claim a deduction for up to 60% of their AGI. For 2020, an individual can claim charitable deductions for up to 100% of their AGI and any excess can be carried forward for five years.

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