COVID-19, CARES Act Cash Payments, and Tax Implications

A Pandemic

Originating in a wildlife and seafood market in Wuhan, China, a new form of coronavirus caught the attention of some physicians of that city in late December 2019 as locals became severely ill and exhibited flu- or pneumonia-like symptoms. These symptoms baffled doctors in that region because the symptoms were similar to those observed during the 2002-2003 SARS epidemic, but people were infected differently.

Eight Chinese whistleblowing doctors tried to warn about the discovery of the novel coronavirus but were suppressed by the Chinese government. The World Health Organization initially believed the virus was nothing more than a seasonal flu and that a wide community spread was highly unlikely. Unfortunately, the WHO’s assessment of the virus’s impact was incorrect and misleading. As most of the world continued everyday life paying no attention to the looming medical and economic threat, the coronavirus silently penetrated the borders of nearly every country. Potential carriers from China went on vacations worldwide during the Lunar New Year celebration in February. Only after the virus infected more than 118,000 people in 114 countries and killed nearly 4,300 people worldwide did the WHO finally declare a pandemic. That was on March 11 — approximately three months after the Chinese doctors’ initial report. The global number of confirmed infections and deaths by COVID-19 has increased drastically since then.¹

The Economic Impact of COVID-19

Because many countries relied on the WHO’s initial assessment of the coronavirus and overlooked the severity of the outbreak, they were unprepared for the physical and economic devastation caused by COVID-19. When the WHO declared a pandemic, many countries suddenly had to implement sweeping measures to reduce the escalating spread of the virus, such as by closing borders, restricting large gatherings and events, and ordering nonessential businesses to shut down. And as more and more of the world’s jurisdictions issued stay-at-home and social distancing orders, many workers — primarily those in the food service, airline, transportation, and travel industries — lost their jobs, and businesses shuttered. The United States was no exception to this global economic downturn and devastation.

There was a tsunami of U.S. unemployment claims in March, after the WHO’s official pandemic declaration. This was also after the number of confirmed COVID-19 cases in the United States surpassed those of any other affected country. By then, 23 states and the District of Columbia had issued orders shutting down or interrupting regular business operations and other economic functions. Suddenly, many employees outside the directly affected industries found themselves without a job because they were unable to work from home.

According to the Labor Department, the number of nationwide applications for unemployment benefits for the week ending March 21 was about 282,000. That number spiked to 6,606,000 for the week ending April 4. Observing that mass loss of employment, the president and members of Congress saw the need to swiftly implement drastic measures to prevent the complete freefall of the U.S. economy and address the recession.

The CARES Act

To stimulate the economy and provide much-needed financial relief, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) in record time, with bipartisan support. The preliminary bill, H.R. 748, was designed to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” The final version of the CARES Act was signed into law by President Trump March 27, after lengthy debates and compromises in both chambers of Congress.

From a monetary perspective, the $2.2 trillion CARES Act is unprecedented.² It designates $560 billion for direct payments to qualified U.S. citizens and nationals (either by direct deposit or a check in the mail to taxpayers who had filed a tax return in 2018 or 2019) — about 94 percent of the U.S. population, according to Congress. Retired seniors whose sole income is from Social Security and who are not required to file a tax return may also qualify for the payment; they are subject to the same rules as non-retired individuals under the CARES Act. The IRS and the Social Security Administration plan to share information with each other, so even if the retirees are not required to file a tax return for either 2018 or 2019, they can still be tracked to receive the payment they are entitled to.

For individual taxpayers, the direct payment is in the form of a refundable tax credit for the 2020 tax year. The CARES Act refers to this as a “recovery rebate for individuals.” It is to be paid out in 2020 instead of in 2021, when taxpayers will file their 2020 returns. Specifically, individuals who filed a tax return for 2018 or 2019 as joint filers will receive a maximum of $2,400, depending on their adjusted gross income. Single individuals and all other filing status taxpayers (for example, head of household and qualifying widow/widower) will receive $1,200 based on their AGI. Both of those amounts may be reduced under a phaseout based on the taxpayer’s AGI as reported on their 2019 returns. For those who haven’t yet filed their 2019 returns, the reported AGI in 2018 will be used to test the amount to be received against the phaseout threshold. The AGI limitation and phaseout amounts are discussed later.

This payment was explicitly stated as a one-time refundable tax credit for 2020 under the CARES Act. However, some legislators hinted that they anticipate the credit might be considered for future years, depending on whether and how quickly the U.S. economy rebounds to a desired level and when the coronavirus infections are considered to have been contained. Also, a family with a qualifying child as defined by section 24(c) will receive an additional child tax credit of $500 without a limit. This no-limit rule is different from the regular child tax credit, under which the allowed amount is reduced from $2,000 to $1,400 per qualifying child when the claiming parents’ AGI exceeds a specified threshold.

Treasury Secretary Steven Mnuchin said that ideally he would like to see individual taxpayers receive this advanced refundable tax credit by April 6 if their tax returns for either 2018 or 2019 had direct electronic deposit information.³ That payment would be delivered much later for those who chose to receive their payments via checks in the traditional mail.

To provide further relief to taxpayers in their compliance effort, the IRS on March 21 officially postponed the previously announced April 15 due date to the now extended due date of July 15 for filing 2019 individual tax returns and paying taxes owed.⁴ That relief included the waiver of potential penalty and interest for all taxpayers (including corporations and partnerships), regardless of the amount of tax owed. Understanding that many taxpayers and their families may need quick cash inflows because of loss of employment or reduced work hours, the IRS urged taxpayers who may be due a tax refund to file their returns electronically with the direct deposit option as soon as possible. The IRS promised to expedite refund payments electronically.

There are exceptions that may disqualify a taxpayer who had filed a return for 2018 or 2019 from receiving the recovery rebate. First, illegal aliens who reside in the United States are ineligible, even if they filed a return. Second, an estate or trust doesn’t qualify as an individual for purposes of the payment. Finally, an individual who was claimed as a dependent by another taxpayer on a return, even if the individual filed their own return, will not receive the $1,200. However, if that individual is not claimed as a dependent for 2020 and their AGI is below the complete phaseout amount, they may receive the same credit, depending on their filing status and AGI.

Phaseout Rules and Examples

The AGI threshold for taxpayers whose filing status is single or head of household begins at $75,000 and $112,500, respectively, and it completely phases out at $99,000 and $136,500, respectively. For married taxpayers filing jointly, the phaseout begins at $150,000 and is complete at $198,000. Taxpayers whose 2019 AGI exceeded the ceiling of the phaseout amount and therefore don’t receive the advanced refundable tax credit payment may qualify to receive it in 2021 if their 2020 AGI falls below the ceiling, depending on their filing status.

Retired taxpayers living solely on Social Security benefits are still entitled to receive the payments even though they might not have to file a return for 2018 and 2019 because their provisional income was below the taxable portion of Social Security benefits. As noted, the IRS and the Social Security Administration will track these retirees through the Social Security payments (SSA-1099) made during those years to ensure that they receive their payments.

The following table summarizes the phaseout rules for CARES Act payments.

CARES Act Advanced Tax Credit Payment for Individuals

Married Filing Jointly
AGI range	≤ $150,000	> $150,000 but < $198,000	≥ $198,000
Amount	$2,400	> $0 but < $2,400	$0
Single or Qualified Widow(er)
AGI range	≤ $75,000	> $75,000 but < $99,000	≥ $99,000
Amount	$1,200	> $0 but < $1,200	$0
Head of Household
AGI range	≤ $112,500	> $112,500 but < $136,500	≥ $136,500
Amount	$1,200	> $0 but < $1,200	$0
The payment is phased out by $5 for every $100 of AGI above the phaseout floor ($75,000 for single, $112,500 for head of household, and $150,000 for married filing jointly). Taxpayers’ refund amount for the 2020 tax year will be received in 2021 and will not be reduced by the amount of the stimulus advanced tax credit payment they receive in 2020.

Example 1: Boyfriend and Girlfriend were an engaged but unmarried couple in 2018. Boyfriend reported $55,000 in AGI, and Girlfriend’s AGI was $85,000. They both filed their 2018 tax returns as singles. They were married February 14, 2019. As of March 2020, as a result of the pandemic, they had not yet filed their 2019 joint return. Because they had not filed their return, their advanced tax credit payment under the CARES Act is $1,200 for Boyfriend because his 2018 AGI was below the $75,000 floor. However, Girlfriend’s CARES Act payment is reduced because her 2018 AGI exceeded the $75,000 threshold and is subject to phaseout. The phaseout amount is $5 for every $100 above the $75,000 floor. Therefore, the payment for Girlfriend is reduced by $500⁵ to arrive at $700 ($1,200 - $500). Their total payments will be $1,900 ($1,200 for Boyfriend and $700 for Girlfriend).

Example 2: The facts are the same as in Example 1, except that Boyfriend and Girlfriend filed their joint return for 2019 in February 2020. Their AGI for 2019 was $140,000 ($55,000 for Boyfriend plus $85,000 for Girlfriend), which is below the $150,000 threshold for joint filers. Therefore, they are entitled to receive the entire $2,400 without being subject to the phaseout rule.

Example 3: The facts are the same as in Example 1, except that Boyfriend received a bonus of $30,000 in 2019, which increased his AGI to $85,000. That increased the couple’s joint 2019 AGI to $170,000, which exceeds the $150,000 floor. Therefore, the advanced CARES Act payment for Boyfriend and Girlfriend is reduced by $1,000⁶ to be $1,400 ($2,400 - $1,000) because of the phaseout.

Example 4: Boyfriend and Girlfriend were married in 2019, and their AGI on their joint 2019 return was $200,000. They would not receive any CARES Act advanced payment because their AGI exceeds the $198,000 ceiling of the phaseout. Without the phaseout rule, they would have received $2,400; however, the $2,400 for married joint filers is reduced by $5 for every $100 (an equivalent of 5 percent) exceeding the $150,000 floor. Because their AGI exceeds the floor by $50,000, their payment is reduced by $2,500,⁷ which results in a zero payment.

However, if Boyfriend and Girlfriend’s 2020 AGI is reduced below $198,000 because of the impact of the pandemic, they will be eligible for the advanced refundable tax credit in 2021 when they file their 2020 joint return. The amount can be used to offset their 2020 tax liability or generate a refund. The same rule about decreased AGI in 2020 also applies to single and head of household filers, to ensure that they can receive the same benefits as the joint filers in 2021 when the tax returns are filed.

Example 5: Boyfriend and Girlfriend were married in 2012. They had two qualifying children before Boyfriend died in 2015. Girlfriend remained unmarried in 2020. She has filed as a head of household since her qualifying widow status expired at the end of 2017. Her AGI for 2018 was $85,000, and she has not yet filed her 2019 tax return. She receives a $1,200 payment for herself and $500 for each of her two qualifying children, resulting in a total amount of $2,200 because her AGI is below the floor of the phaseout amount of $112,500 for head-of-household taxpayers.

Example 6: The facts are the same as in Example 5, except that Girlfriend received a bonus of $30,000 in 2019, which increased her AGI to $115,000, and she filed her 2019 tax return in February 2020. Her $115,000 AGI exceeds the AGI floor of $112,500. The CARES Act payment for Girlfriend is reduced by $125⁸ to be $2,075 ($2,200 - $125) because of the phaseout.

Suggestions for Tax Practitioners

The entire world has been harmed by the 2020 coronavirus pandemic, with overburdened medical professionals and systems, the loss of loved ones, global economic recession, and the challenges of adjusting to living in a strange and unfriendly new reality. For many — including tax professionals — that adjustment means changing the way they conduct business and interact with clients. In this quickly changing landscape, it is important for tax professionals to keep abreast of the latest legislative and administrative developments.

Let’s hope that the coronavirus pandemic will be controlled soon and the that the number of deaths will be minimized. In the meantime, tax professionals can best help their clients by advising them with the most up-to-date information — and with compassion.