The Coronavirus Aid, Relief and Economic Security Act (CARES) Provides Much Needed Tax-Free Assistance to Families and Individuals

Based on the ACLJ’s review of the CARES Act, it is clear beyond question that the Bill, which was passed unanimously by the Senate, would supply much needed assistance to workers and families who are challenged by the nation’s current pandemic.

Below we provide some general information about what to expect regarding the individual payments in this bill, and what this looks like from a tax perspective. However, it should be noted that each individual situation will be different and to understand how this will impact you directly, you should contact a tax professional.

Size of Tax Rebate Checks

The current bill is directed toward helping the mainstream economy that has been slowed as governments have ordered businesses closed and asked people to stay in their homes. Tax Rebate Checks could go out in as little as three weeks. The size of the rebate check for eligible individuals filing individually will be $1,200 per person or $2,400 for those filing a joint return plus an amount equal to $500 per child. Eligible individuals would receive the full rebate amount if their income does not exceed $75,000 for individuals, $112,500 for the head of household, and $150,000 for joint filers. For incomes above the above-referenced thresholds, the size of the rebate check will be adjusted downward by 5% of the amount of adjusted gross income exceeding the stated amounts.

How is eligibility determined?

As the Wall Street Journal reports:

[T]he advance payments will be determined based on 2019 income—or 2018 income if that is all that is available to IRS—and the final amount of the benefits will be determined based on 2020 income and settled on the 2020 tax return. So people who ultimately qualify for more money than they receive this year—a person whose income drops from $100,000 to $70,000, for example—would get the rest through a larger tax refund or smaller tax payment in early 2021. But people who ultimately qualify for less money than they got this year—a person whose income rises from $70,000 to $100,000—wouldn’t have to pay it back.

Taxability of Tax Rebate Checks?

If the Bill passes the House of Representatives, Title II Subtitle B of the Bill provides a Recovery tax rebate for individuals and families that is essentially a tax credit. Tax-credits, as a practical matter, constitute a dollar-for-dollar reduction of the income tax payments individuals would otherwise owe. Tax credits do not generally give rise to taxable income and therefore, they do not trigger tax liability.

1. Analysis:
• Importantly, tax credits reduce the amount of income tax an individual owes to the federal government whereas a tax deduction simply reduces one’s adjusted gross income. Credits are generally designed to encourage or reward certain types of behavior that are considered beneficial to the economy.
• Under Title II, Subtitle B, Section 6428.2020, the Bill provides for coronavirus stimulus recovery rebates for eligible tax filers. Specifically, in the case of an eligible individual the Bill allows a credit against the Tax imposed by the IRS, for the first taxable year beginning in 2020.
• The Federal Government essentially treats tax filers as if they had already made excess tax payments for 2020. It then rebates or credits back to them funds consistent with the above-referenced provisions and amounts in the Bill. Keep in mind that a tax credit is a dollar-for-dollar reduction of the income tax you owe thus reducing the amount of income tax owed in a given year.
2. How tax credits work (An example)

   In general, a tax credit is a dollar-for-dollar reduction of the income tax you owe. For example, if you owe $1,000 in federal taxes but are eligible for a $1,000 tax credit, your net liability drops to zero. Some credits, such as the earned income credit, are refundable, which means that you still receive the full amount of the credit even if the credit exceeds your entire tax bill. Therefore, if your total tax is $400 and you claim a $1,000 earned income credit, you will receive a $600 refund. Early indications are that the CARES Act Tax rebate/tax credit will work in a similar way.

3. Tax Credits versus Tax Deductions

   Borrowing from TurboTax’s general analysis, as a rule, save you more in taxes with a tax credit than with deductions. Deductions reduce the amount of your income that is subject to tax, whereas, credits directly reduce your total tax liability. To illustrate, suppose your taxable income is $70,000 and you have $10,000 in deductions, which reduces your taxable income to $60,000. If that $10,000 would have been taxed at a rate of 25 percent, then the deduction saves you $2,500 in tax. If the $10,000 was a tax credit instead of a deduction, your tax savings would be $10,000 rather than $2,500.

Finally, because the ACLJ does not provide tax advice or offer tax planning, for specific answers to your tax questions regarding the receipt of a CARES Act tax rebate check, please consult with a tax professional.