In our first part of our analysis about how the Coronavirus is impacting people’s US Tax Returns. I focused on the extension of filing and payment deadlines, as well as the lenience of IRS enforcement during this unprecedented time period. The second part focused on much of the tax relief available to US based businesses through the FFRCA and CARES Acts. In this blog post, I’ll be discussing some of the issues that are probably of the most interest to US citizens residing outside the US, tax relief available to US individuals and how your tax returns relate to the receipt of the federal stimulus payments.
In order to access emergency funds from US Taxpayers’ retirement accounts, the CARES Act stipulated that US Individual Taxpayers can receive a Coronavirus related distribution from their retirement accounts of up to $100,000, regardless of their age, which will be free of the 10% early withdrawal penalty. If the US Taxpayer accepts the IRA Rollover rules, they can pay the Coronavirus related retirement distribution back to their retirement account over a three-year period starting from the day of distribution without being subject to excess contribution penalties. If the US Taxpayer would like to keep the Coronavirus related distribution, they have the option to spread out the reporting of the income in equal amounts throughout their 2020, 2021 and 2022 tax returns. Furthermore, if a US Taxpayer would like to take out a loan from an employer-sponsored retirement plan, such as a 401k plan, the maximum loan amount has been increased from $50,000 to $100,000. And retired US Taxpayers that have a Required Minimum Distribution requirement from their IRA accounts do not have to take the Required Minimum Distribution for 2020 without incurring any penalties if they choose not to.
To qualify for this one-time tax benefit, a Coronavirus-related retirement distribution is defined as distribution made between January 1st, 2020 and December 31st, 2020 to an individual who fits the following criteria:
· An individual, an individual’s spouse or an individual’s dependent who is diagnosed with Covid-19 from a CDC approved test, or
· An individual who experiences adverse financial consequences due to the Covid-19 outbreak that results in quarantine, furlough, lay off or a significant reduction in work hours, inability to work due to lack of childcare, or the closing or decrease in opening hours from a business owned by the Taxpayer.
There is a possibility that the IRS may add more factors to these criteria as more information about the Coronavirus and its economic impact becomes apparent.
One aspect of the Tax Cuts and Jobs Act that has significantly changed the behavior of Taxpayers is the increase in the Standard Deduction for every filing status. This has led to many taxpayers no longer itemizing their deductions, which has in effect deterred many taxpayers from making charitable contributions which were tax deductible prior to 2018. The CARES Act adds a maximum $300 adjustment to income deduction for US Taxpayers who take the Standard Deduction. This is a permanent change and is applicable to all tax years after December 31, 2019.
Additionally. US Taxpayers can exclude from gross income up to $5,250 that they receive from their employer to pay for the principal or interest on a student loan.
The topic that is going to be of most interest to US citizens residing inside and outside the US is the financial stimulus payments that the majority of US citizens are entitled to. The CARES Act includes a $1,200 refundable tax credit to each US citizen who’s Adjusted Gross Income (AGI) on their 2018 or 2019 income tax returns doesn’t exceed the following levels:
· Single - $75,000
· Married Filing Jointly - $150,000
· Head of Household - $112,500
If your income on your 2018 or 2019 tax return exceeds the minimum amount, the credit will be reduced by 5% of AGI over the base amounts until phased out. However, if you don’t qualify for the stimulus payment because your income for 2018 or 2019 exceeds the base amount, yet your income for 2020 is reduced because of a significant slowdown in economic activity, you do have a chance to get the credit when you file your Form 1040 for 2020 in 2021. If your refundable credit is reduced, you will get the remainder of the credit with your 2020 refund. If your income for 2020 increases from 2018 or 2019 to a level that would phase out the refundable credit, you're not required to pay back the credit with your 2020 tax return. Additionally, for Taxpayers that have dependents that qualify for the Child Tax Credit, you will get an additional $500 for each qualifying child.
The income level will be evaluated by your 2018 Form 1040 for taxpayers who have not filed with 2019 Form 1040 as of yet. If you qualify for the stimulus payment based on your 2018 income, yet your 2019 income exceeds the phase out amount, it might be a good idea to postpone filing your 2019 tax return until after you receive the stimulus payment, particularly since Tax Day was extended until July 15th.
There’s a couple more issues that should be addressed regarding the stimulus payments. First, the stimulus payments will not be reduced for Taxpayers that owe back taxes or have defaulted on their student loans. As of now, the only federal debt that will block a stimulus payment from going to a Taxpayer is delinquent child support payments. Second, retired US citizens that only receive Social Security and don’t have a US tax return filing requirement should receive the stimulus payment without having to file a tax return. Third, the income levels are just based on a Taxpayer’s AGI. As of the date of this writing, there doesn’t seem to be any indication that a US Taxpayer residing outside the US who uses the Foreign Earned Income Exclusion will have their income level adjusted for the excluded amount. This could very well change once the stimulus payments become distributed. Fourth, this stimulus payment is only available to US citizens or permanent residents with a valid Social Security Number. Non-Resident Aliens with an Individual Tax ID Number will not qualify for the stimulus payment.
The US Treasury Secretary, Steven Mnuchin, has indicated that the stimulus payments will be sent out in the next three weeks. The IRS has said that Taxpayers who received a refund from their 2018 tax return that was direct deposited into their US bank account should receive the stimulus payment by direct deposit. Otherwise, the US Treasury will mail checks to the last known address on file of each US Taxpayer. Therefore for US Taxpayers who have yet to file their 2019 US tax return, it’s a good idea to make sure that you can receive mail at the address that was used on your 2018 Form 1040 if you expect to qualify for a stimulus payment.