CARES Act tax notes

The Coronavirus Aid, Relief and Economic Security (CARES) Act enacted March 27, 2020, poured approximately $2 trillion into financial aid programs, putting an estimated $560 billion cash directly into the taxpayers' pockets. What gets taxed?

1. Estimated at $300 billion, the Economic Income Payment program offers immediate relief to lower-income taxpayers as a 2020 income tax credit.

If you don’t qualify for the full stimulus payment now (based on your most recent AGI) and your 2020 income falls within the phase-out ranges, you are entitled to any unused credit when you file next year. If your 2020 income puts you beyond the brackets but you received a stimulus payment this year, you will not have to pay it back.

Note: Like income tax refunds, the stimulus checks have become a bonanza for scammers and fraudsters looking to score your money. If you qualify for a stimulus payment but haven't received it, you can check with the IRS at https://www.irs.gov/coronavirus/get-my-payment.

2. Estimated at $260 billion, the Pandemic Unemployment Assistance Program extends and increases unemployment benefits for individuals.

The program expands coverage to more workers, including self-employed and gig workers who are ineligible for other UI benefits and are not receiving paid leave and whose employment has been impacted by the coronavirus.

All eligible UI benefits will be augmented by an additional $600 weekly benefit for weeks of unemployment ending on or before July 31, 2020.

UI is taxable income. Taxpayers will be required to disclose all of their unemployment insurance benefits, including the augmented $600 payments, when they file their taxes.

Not every unemployment office automatically withholds taxes. The IRS will expect you to pay the full tax you owe by the filing deadline. If you don't pay the estimated taxes on this income throughout the year, you may face an underpayment penalty.

State laws determine an individual's benefit amount based on their recent earnings. All unemployment insurance benefits are administered by the states, and the states determine whether workers qualify for benefits. Individuals who think they may qualify for benefits will need to file a claim with their state labor department. You can find information about unemployment insurance for your state from the U.S. Department of Labor website.

3. Refunds for tuition, room and board from educational institutions.

If you made payments for educational expenses from 529 accounts this year, you may receive a refund from the educational institution for tuition and room and board due to school closings. Since the refunded amounts are no longer being used for qualified educational expenses, the IRS could recharacterize them as taxable distributions. To avoid this risk, 529 plan account owners should consider recontributing refunded amounts into their accounts.

Note: Reimbursements must be recontributed within 60 days from the date the refund was issued.

For more information about the CARES Act and other tax issues, contact your Estate Planning attorney. Visit the firm's Coronavirus Response Team's website for updates.