On March 27th, 2020 President Trump, signed into law, the largest stimulus package in U.S. history, estimated at some US $2.2 trillion. The CARES Act is the U.S. federal government’s response to the COVID-19 pandemic and its impact on the U.S. economy. The CARES Act passed the United States Senate on March 25th, 2020, by a vote of 96-0 and passed the House by a voice vote on March 27th, 2020. It is estimated that out of those funds, in addition to individual rebates, that some $510 billion will go towards loans and grants to large companies, $377 billion towards smaller businesses, and $260 billion for expanded and extended unemployment benefits.
An estimated $290 billion will be used for individual tax rebates, known as the 2020 Recovery Rebate. The rebate will be claimed as a credit against the taxpayer’s income tax liability for the first taxable year beginning in 2020. The payments represent an advance on that credit.
The United States State Department has estimated that at any one time up to 7 million Americans may be living abroad. In our mind, there are two immediate questions:
- How are Americans abroad impacted by the CARES Act?
- What happens if you claim the foreign earned income exclusion (“FEIE”)?
What happens now?
The U.S. government has stated that they will try and get the cash into taxpayer’s hands as soon as possible. Under the legislation, the cash advance will be equal to U.S. $1,200 per “eligible individual” (U.S. $2,400 on a married filing joint basis). There is an additional US $500 credit per eligible child, as defined under the Internal Revenue Code (“IRC”).
The term “eligible individual” means any individual other than: (A) any nonresident alien individual; (B) any individual with respect to whom a personal exemption (a deduction allowed under IRC §151) is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, and (C) an estate or trust. It should be noted, however, that the exemption amount under IRC §151 means zero until December 31, 2025 under the 2017 Tax Cuts and Jobs Act (TCJA).
The amount of the credit allowed, however, shall be reduced (but not below zero) by 5 percent of so much of the taxpayer’s adjusted gross income as exceeds $75,000 for an individual, $112,500 in the case of a head of household return or $150,000 in the case of a joint return. In general, payments will be based on the taxpayer’s 2019 tax return information (if already filed) or the taxpayer’s 2018 tax return (if the 2019 return has not yet been filed).
The rebates will be eliminated when adjusted gross income exceeds $99,000 for single taxpayers (with no children) and $198,000 for married taxpayers (with no children).
There is no requirement that the “eligible individual” be a resident of the United States in order to qualify for the credit.
What happens if I never filed a U.S. individual income tax return?
The CARES Act states that recipients must have filed a tax return in 2018 or 2019 in order to receive the Rebate. The Act gives Treasury flexibility in establishing eligibility for the Rebate. Treasury has not yet, however, indicated how they will proceed to deliver Rebates to those who have not yet filed prior year tax returns.
There is no mechanism for registering for nor applying for the Recovery Rebate. Whether Treasury will implement any such procedure remains to be seen.
The Foreign Earned Income Exclusion (FEIE)
Eligible taxpayers whose tax home is outside of the United States may have reduced their adjusted gross income (AGI) by claiming the foreign earned income exclusion. For 2020 the maximum FEIE deduction is US $107,600 (2019 – $105,900, 2018 – $104,100 ). The Act does not define AGI for purpose of the Rebate. As such, until such time as additional guidance is (if) provided it is assumed that the definition of AGI will remain unchanged.
What happens when I file my 2020 individual income tax return?
Technically, the cash that will be received is treated as an advance credit against the taxes imposed on an “eligible individual” for the first tax year beginning in 2020. The allowed credit will be equal to the lesser of:
- net income tax liability, or
- $1,200 ($2,400 in the case of a joint return).
An eligible individual’s “net income tax liability” means the excess of the sum of the taxpayer’s “regular” tax liability and alternative minimum tax, if applicable, over credits allowed pursuant to Part IV, Subchapter A, Chapter 1 of the IRC. Part IV, “Credits against tax”, encompasses IRC §21 though IRC §54AA. Credits not to be taken into account, for the computation, include the child tax credit (under IRC §24) and refundable credits under IRC §31 through IRC §37.
Foreign tax credits are allowed pursuant to IRC §27 (as provided under IRC §901) and fall with Part IV. As such the “net income tax liability” appears to be after foreign tax credits are claimed. In other words, an actual net U.S. income tax liability.
As such it is entirely possible that the actual credit that will be allowed, on the “eligible individual’s” 2020 tax return will be less than the cash payments received. There will be a true-up for the amount for which one is eligible on the filing of their 2020 individual income tax return.
At this point in time, it appears that any overpayment, associated with the Rebate, will be forgiven. There is no requirement to repay the overpayment.
We await further guidance from the IRS on the CARES Act and will provide updates as they are available.
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