The CARES Act - How it Works

Elizabeth Jones |

March 31, 2020

First, a reminder from our last mailing: The CARES Act has declared a moratorium on taking required minimum distributions (RMDs) from IRAs and other plans, and people who took a distribution this year will be allowed to return the money to their tax-deferred account. However, people who inherited IRAs and already took distributions are not eligible to return the money back into the account and must continue to take their RMDs as scheduled. Please call our office if you have any questions.

How does the CARES Act work? Let’s say you’ve received the CARES Act check from the U.S. government. The question then becomes: how is it taxed and how, exactly, is it administered?

The simple answer is that the rebate is not taxable; it is considered to be a refundable tax credit, like the Child Tax Credit or the Earned Income Tax Credit.  It does not increase your taxable income on your 2020 tax return.

But there may be an adjustment to how much you are owed. These “recovery rebates” are actually considered an “advanced payment” of a credit, and the amount you are eligible for could depend on the 2020 tax return that you won’t file until next year. 

When check recipients prepare their 2020 tax returns, they’ll have to re-compute the payment they should be receiving based on 2020 tax data. If they earned more money in 2020 than they did previously, or if a 17-year-old turned 18, they will have received an excess. This excess will, under the current Act, be forgiven.

What if a taxpayer who did not receive a check due to high income is laid off in 2020 and, therefore, reports significantly less income from this year? He or she would be eligible to receive a check based on the same criteria that applied for the previous tax year. 

In other words, if, in any tax year 2018, 2019 or 2020, a person’s income falls under the payment thresholds ($75,000 for single taxpayers; $150,000 for joint filers, phasing out at $99,000 and $198,000 respectively), then that person would qualify for the payment.

In cases where someone is in the phaseout range in 2019 but below the threshold in 2020, the government would, under the law, make up the difference. The same would be true if a child is born in 2019 or 2020, adding to the child credit amount promised by the government.

Best Regards,

Beth Jones, RLP®, AIF®, CeFT®
Certified Financial Transitionist®
Registered Life Planner
Financial Consultant

Third Eye Associates, Ltd. is a Registered Investment Adviser