Tracking CARES Act tax changes

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 01/13/21

With a range of temporary tax-code changes instituted by the CARES Act in 2020, it can be challenging to keep track of which programs have expired and which ones were extended through 2021. The changes impact tax, retirement, and education provisions of the tax code and were designed to help individuals and businesses navigate the pandemic.

For an overview of the original bill, see “Understanding the CARES Act and its implications for individuals and businesses.”

While some provisions expired at the end of 2020, several tax changes were extended through 2021.

Status of programs in 2021

Suspension of required minimum distributions (RMDs). The CARES Act suspended RMDs for calendar-year 2020. However, this provision was not extended. Account owners over the age of 72, or those who have inherited retirement accounts, will have to take RMDs in 2021.

Penalty-free retirement distributions. The CARES act allowed penalty-free distributions (up to a total of $100,000) in 2020 from IRAs or retirement accounts for qualified individuals who were impacted by the COVID-19 virus.* Individuals who took advantage of this provision have the option of reporting income from the distribution equally over the 2020, 2021, and 2022 tax years. This provision expired at the end of 2020.

Delay in student loan payments. Federal student loan payments were initially delayed through the end of September 2020 through the CARES Act. In August, President Trump extended the delay until the end of 2020. The Secretary of Education pushed the delay further and extended it to the end of January 2021. The new administration could potentially issue another extension.

"Above the line" charitable deduction. A new charitable deduction was introduced by the CARES Act. A charitable deduction is available to all taxpayers, regardless of whether they choose to itemize deductions on their tax return. The maximum amount of the deduction is $300 (regardless of filing status) and applies to cash contributions to public charities. The relief bill signed into law in late December extends the deduction through 2021 and increases the total to a maximum of $600 for married couples filing a joint tax return.

Increase in the income threshold for charitable deductions. The CARES Act also temporarily increased the maximum charitable deduction amount to 100% of adjusted gross income (AGI) for 2020, applied to charitable cash contributions to public charities. The December COVID-19 relief package extends the provision through 2021.

More changes possible

Individuals and business owners may want to reach out to a financial advisor to track provisions that they may take advantage of in 2021. Some programs such as the Paycheck Protection Program already received a fresh round of funding in the December relief bill.

*Qualified individual is defined as being diagnosed with COVID-19, having a spouse or dependent diagnosed, experiencing adverse financial consequences as a result of being quarantined, furloughed, or laid off, having work hours reduced, being unable to work due to lack of childcare, or closing or reducing hours of a business that you own or operate.