Due to the coronavirus pandemic, a number of new IRS rules have been made. What will follow is part 2 of a 3 part discussion of changes to IRS code from the Cares Act. The work was done by Charles Rotblut CFA of the American Association of Individual Investors (AAII).
It is in 3 parts. Who can read that much tax code all at once? It is important even if the subject matter isn’t exciting.
Changes in the Tax Treatment of Charitable Donations
The CARES Act allows for deduction of $300 of charitable donations above the line for the 2020 tax year. The deduction applies whether you take the standard deduction or itemize.
There is a removal of the cap on deducting cash charitable donations. Previously, individuals had a limit of the equivalent to 60% of their contribution base which is typically AGI. Now they can deduct up to their contribution base for 2020.
The CARES Act states, “Any qualified contribution shall be allowed as a deduction only to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer’s contribution base.” The suggestion is that you read IRS Publication 526 to learn more about the rules for charitable giving.
IRS still allows qualified charitable donations (QCDs) for those who are 70½ and older. A QCD is a donation made to a qualifying charity directly from an IRA. Because there are no required minimum distributions (RMDs), QCDs made in 2020 will not have a tax impact. They will, however, affect future years’ taxes by reducing the size of the IRA and thereby future RMDs. The limit on QCDs is $100,000 per year.
Waiver of Early Withdrawal Penalty for Coronavirus
There is a 10% penalty on withdrawals from retirement accounts made prior to age 59½. The CARES Act waives this penalty for 2020… if a person, their spouse or dependent gets a diagnosis of coronavirus or if they experience “adverse financial consequences” as a result of the pandemic. Such events include quarantine, furlough, lay off, reduction of working hours and being unable to work due to a lack of child care.
The withdrawals are taxable if not repaid. There is a removal of only the early withdrawal penalty. The tax on withdrawals can be spread over three years. The maximum amount eligible for withdrawal is $100,000.
Tax Rebates Are Not Taxable
Many of you may have received the tax rebates by the time you read this. The CARES Act specifically describes the rebates as a “credit” in the CARES Act and they will not count as taxable income. They were based on the adjusted gross income (AGI) listed on your 2019 tax return. If you did not file your 2019 return the AGI from your 2018 tax return replaces it in the calculation.
There could be a reconciliation to make on the 2020 tax return because this an advance credit. Should the reconciliation show a taxpayer’s eligible rebate to be higher than what they receive, you can claim the difference on the return. Taxpayers who receive more than they should have are tax practitioners do not expect to have to pay the difference back. Such situations would occur if a taxpayer’s income fell or rose, respectively, in 2020 relative to 2019.
Kiddie Tax Changed Back to Parent’s Tax Rate
The Tax Cuts and Job Act (TCJA) changed the tax rates assessed on unearned income for children under age 18 and students up to age 24 to the same as trusts and estates. The SECURE Act contains a provision revoking this change. As a consequence, minors’ unearned income will go back to being taxable at their or their parent’s tax rate, whichever is higher. According to the Kiplinger Tax Letter, the repeal is retroactive and can apply to both 2018 and 2019 taxes. Due to the coronavirus pandemic, a number of new IRS rules have been made.