Congress and the President are set to enact a $2 trillion stimulus package called the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). As you might expect there are a number of dynamics to such a large and complicated undertaking, and we usually do not comment on proposed legislation until it is actually passed. However, in this case there is an immediate tax planning opportunity that could effect taxpayers considering filing their 2019 income tax return in the next few days, so we wanted to get this to you as soon as possible.

All taxpayers are potentially eligible to receive a refundable CARES credit:

  • $1,200; $2,400 for eligible individuals filing a joint return
  • $500 for each qualifying child of the taxpayer

There is an income limit eligibility for receiving these payments:

  • To receive the full credit the recipients income must be below:
  • Individuals; $75,000
  • Filing jointly; $150,000
  • Head of Household; $112,500

  • Income above these limits will phase out the CARES credit entirely at the income levels of:
  • Individuals; $99,000
  • Filing jointly; $198,000
  • Head of Household; $146,500

This is based on Adjusted Gross Income of your most recently filed tax return - and this is where the potential tax planning opportunity comes into play

If you have already filed your 2019 income tax return it will be used to determine your rebate payment. If you have not filed it (and remember it is not due until July 15th; October 15th with extension) the IRS will use your 2018 income tax return to determine your CARES credit. This leaves several potential scenarios if your income is in the phase out range or below:

  1. If your 2018 income is less than your 2019 income, consider NOT filing your 2019 income tax return at this time
  2. If your 2019 income is below your 2018 income, consider getting your 2019 tax return filed immediately
  3. If your are in the phase-out range and getting ready to file your 2019 income tax return, certain actions such as an IRA contribution to lower your Adjusted Gross Income might have a double benefit in 2019 by lowering your income tax liability and increasing your CARES credit.
  • Note: Depending on some timing issues it might even be worthwhile amending your 2019 income tax return if it already filed but you now want to contribute to a 2019 IRA; the contribution date is extended to July 15th this year.

We will be reviewing all tax returns for this potential issue over the next couple weeks, but if you think this applies to your situation please let us know.