In one of its most notable provisions, the CARES Act provides for direct payments to taxpayers with social security numbers. Beginning in 2020, “eligible individual” taxpayers will receive a tax credit equal to the sum of $1,200 for single filers ($2,400 for those filing a joint return) plus an amount equal to the product of (i) $500 multiplied by (ii) the number of qualifying children (those under age 17). For example, a typical family of four is eligible for a $3,400 recovery rebate.
However, the credits will be phased out by 5% of the amount by which such eligible taxpayer’s adjusted gross income exceeds $150,000 for joint filers, $112,500 for heads of household, and $75,000 for all other types of filers. This means that, for a typical family of four, the tax credit will phase out entirely at $218,000.
Nonresident aliens (under IRS rules), dependents of taxpayers, estates, and trusts will not be eligible for the tax rebate. To defeat nonresident alien status, non-citizens will have to meet either the green card test (if you are a lawful permanent resident of the United States at any time during the calendar year) or the substantial presence test for the calendar year (January 1-December 31). To meet the substantial presence test, a person must be physically present in the United States on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days they were present in the current year, and
- 1/3 of the days they were present in the first year before the current year, and
- 1/6 of the days they were present in the second year before the current year.
Even though they may be taxpayers, those with F and J visas are nonresident aliens by default.
It is important to note that college students are eligible for a recovery rebate only if they are not considered a dependent of their parents. Generally, a full-time college student under the age of 24 is considered a dependent if their parents provide more than half of their support.
The best way to ensure receiving a recovery rebate is to file a 2019 tax return, but no action is actually required on the part of those who have filed a 2018 tax return since the IRS will use a taxpayer’s 2018 return if they have not yet filed their 2019 return.
The CARES Act also allows taxpayers to take an above-the-line tax deduction for charitable contributions of up to $300 for the tax year beginning in 2020.
In order to help individuals with their expenses in receiving coronavirus treatment for themselves or their families or with financial hardship due to the pandemic, the CARES Act removes the 10% tax penalty imposed on early withdrawals from retirement accounts up to $100,000 in the aggregate. Withdrawals that qualify as “coronavirus-related distributions” made from both eligible employer-sponsored retirement plans and individual retirement accounts (IRAs) will be exempt from the 10% early distribution penalty tax but may be subject to regular income tax. However, if these coronavirus-related distributions are repaid to the respective retirement accounts within three years of the withdrawal, they will be considered as rolled over.
For purposes of the CARES Act, a “coronavirus-related distribution” is generally defined as any distribution from an eligible retirement plan made: (a) on or after January 1, 2020, and before December 31, 2020, (b) to an individual (i) who is diagnosed with COVID-19, (ii) whose spouse or dependent is diagnosed with COVID-19, or (iii) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, had hours reduced, or other factors as determined by the Secretary of the Treasury during the COVID-19 pandemic.