Answers to Questions about COVID-Related Payments

As a result of the pandemic, Congress has created a number of payments and programs for individuals to help them financially. If you’ve received one or more of these payments or benefited from one of these programs, you may be wondering how they are handled. Are they taxable or tax free; are they deductible?

Is my Economic Impact Payment taxable?

The CARES Act provided for Economic Impact Payments up to $1,200 per individual and up to $500 per child under age 17. However, income limits capped the payments, with a phase out for those with higher income. As a result, no payment was made for singles with adjusted gross income (AGI) of $99,000 or more, or for joint filers with AGI of $198,000 or more. The IRS determined the amount of the payment using the information from your 2019 return if available, or if not, using your 2018 return. Your payment was (or will be) made via direct deposit to your bank account, a check from the Treasury, or a debit card loaded with your Economic Impact Payment.

The amount you receive as an Economic Income Payment is not taxable. What’s more, because the payment is actually an “advance” of a tax credit for 2020, you might be entitled to an additional tax credit when you file your 2020 return. This could be the case if your income for 2020 is lower than the income on the return (for 2018 or 2019) used by the IRS to figure your payment, or your child was born in 2020. If it turns out that you received more than you “should have” based on your 2020 return, you will not have to return the excess and you aren’t taxed on this amount.

Is my emergency education aid grant taxable?

Higher education emergency financial aid grants were authorized by the CARES Act. These are funds given to undergraduate and graduate students experiencing unexpected expenses and unmet financial needs as a result of the pandemic. Grants used to pay for food, housing, healthcare and certain other costs are not includible in gross income. Tax-free amounts also cover course materials for online learning.

But you can’t also claim other tax breaks related to expenses covered by the payments. This means that if the grant is not includible in gross income, then you can’t claim a tuition and fees deduction, the American opportunity credit, or the lifetime learning credit.

I recently received paid sick leave and paid family leave from my employer. Is this taxable?

The Families First Coronavirus Response Act mandates small and mid-sized businesses to provide certain paid sick and family leave related to COVID-19. Such leave is treated as taxable compensation. This means it’s subject to income tax withholding and the employee share of FICA.

This qualified sick leave and family leave amounts constitute wages for purposes of figuring other employee benefits, such as contributions to 401(k) plans and employer-paid group term life insurance.

I received assistance with my mortgage. Now what?

The CARES Act provided assistance to homeowners with federally-backed mortgages. This assistance wasn’t direct payments to lenders. Instead it delayed required payments or other actions for some period:

• There was a 60-day moratorium on foreclosures as of March 18, 2020.
• Homeowners could request 6 months of mortgage forbearance during the same 60-day period, with the option of an additional 6-month extension. During this period, lenders can’t charge fees or interest beyond what would have been regular payments. But loan forbearance doesn’t make the obligation disappear; it’s not forgiveness. It merely postpones repayment. Some lenders are requiring a lump-sum payment at the end of the forbearance period.

Mortgage interest continues to be deductible by individuals who itemize personal deductions in lieu of claiming the standard deduction amount. Only actual interest payments are deductible, so amounts deferred during 2020 and not paid by the end of the year are not deductible on 2020 returns.

Conclusion

When the federal government provides financial assistance, there are always tax consequences. They may be favorable or not. If you have any questions on your personal situation, contact a tax advisor.

Sources: https://www.irs.gov/newsroom/faqs-higher-education-emergency-relief-fund-and-emergency-financial-aid-grants-under-the-cares-act; https://www.consumer.ftc.gov/blog/2020/05/did-nursing-home-or-assisted-living-facility-take-your-stimulus-check