It’s been quite a year so far. Wildfires in Australia, an impeachment trial of Donald Trump, the death of Kobe Bryant, and the Coronavirus pandemic. Oh yeah, and don’t forget that it’s an election year.
Given the roller-coaster year it’s not hard to miss some of the tax planning opportunities that have arisen from the Coronavirus and the resulting stimulus legislation.
To help make sure you don’t leave any planning opportunities on the table, this post will review the top Coronavirus related tax opportunities for individuals.
Foregoing 2020 RMDs
I’ve been using the word “holiday” to describe this part of the CARES Act. This far into the pandemic we’ve had to cancel two vacations as a family, it stings a little deeper every time I think of the word.
So if reading the word “holiday” pains you like it stings me, just know that you don’t have to take mandatory distributions from retirement accounts this year. This is true for your own accounts AND accounts you’ve inherited from others (both spouses and non-spouses). It does not appear to cover 72(t) distributions.
Replacing Unwanted 2020 RMD Already Taken
What’s more, the IRS will let you put back RMDs you’ve already taken for 2020. As long as it’s done by August 31st, you are free to replace an unwanted RMD by depositing the funds back into your IRA or workplace retirement plan. Note that this feature is only offered if you were required to distribute funds this year in the first place. Unnecessary distributions from retirement plans must be replaced by July 15th.
The Stimulus Checks!
Perhaps the most memorable piece of the CARES Act are the “economic impact payments”, or EIPs. Those who qualify for them will receive $1200 (single filers) or $2400 (couples filing jointly), plus $500 per qualifying child.
Not everyone will receive a check. You must be a U.S. citizen with a social security number who cannot be claimed as a dependent by anyone else. There are income limitations too. Single filers with adjusted gross income over $75,000, and joint filers with AGI over $150,000 will have credits by 5% of the amount they went over.
For example, a single filer with $90,000 of AGI would have exceeded the threshold by $15,000. This would result in a reduction of $750, making their rebate check $1200 – $750 = $450. The IRS used the most recent taxpayer information they had available. If you had your tax return filed by mid April that means your 2019 data would be used, otherwise the IRS would have reverted back to your 2018 return.
One important feature of the EIPs I should note is that they are NOT an advance of your 2020 tax refund. They are a new forgivable tax credit. That means that you will not need to pay them back if your 2020 income increases beyond the thresholds above. What’s more, if you didn’t qualify for a check based on your 2019 or 2018 numbers but will in 2020, you’ll receive the credit when you file for 2020.
Extended Filing Deadlines
The IRS announced on March 21st that it would extend the tax filing deadline for individuals from April 15th to July 15th. This also means that any payments due on April 15th (including estimated payments) will not be due until July 15th. This applies to returns for individuals, trusts, and corporations.
Unfortunately, not all states provided the same relief. Some states retained the April 15th deadline, while others extended the filing deadline but not the payment deadline. Here’s a state by state breakdown.
Now that we’re creeping up closer to July 15th the point will mostly be moot. But for those who haven’t filed taxes yet, I’d suggest doing so ASAP if you expect a refund. No reason to let the IRS hang onto your hard earned cash when it could be sitting in your bank account. For those expecting a payment due…..maybe wait until a little closer to the deadline.
Penalty Free IRA/401(k) Withdrawals
Ordinarily, if you’re under 59 1/2 distributions from your retirement accounts will come with a 10% early withdrawal penalty. Another provision of the CARES Act providing relief to those impacted by COVID-19 eliminates this penalty.
Basically, if you’re impacted negatively by COVID-19 you may withdraw up to $100,000 from your retirement accounts in 2020 free of penalty. On top of that, rather than being forced to claim all the income on your 2020 tax return, you may spread it out over a three year period. You may also replace the funds within three years of distribution.
To qualify you’ll need to:
- Be diagnosed with COVID-19
- Have a spouse diagnosed with COVID-19
- Experience adverse financial consequences as a result of COVID-19. This could include being laid off, having hours reduced, being unable to work because you can’t find child care, or because you’re quarantining.
One thing to note here is that if you plan to take out funds from a 401(k) or workplace retirement plan, your plan must specifically allow such distributions first. This will likely require the plan to make an amendment to its plan document (which governs its operations). So while this remains an option, management isn’t necessarily required to make such accommodations.
Above the Line Charitable Deductions
The accounting profession like to use the term “above the line” or “below the line” to describe the location of various parts of your tax return. The “line” is your adjusted gross income. And in general, deductions that fall above the line are more favorable than those that fall below the line.
Reason being here is that deductions below the line are reported on Schedule A, which summarizes your itemized deductions. As you may know, you have the choice between taking the standard deduction (available to everybody) or adding up your itemized deductions and reporting them on Schedule A.
In 2020 the standard deduction is $12,400 for single filers, and $24,800 for married people filing jointly. So, if your total itemized deductions fall below those numbers, you’ll want to take the standard deduction instead.
The CARES Act included a provision that adds an above the line deduction for charitable contributions. This is notable, since charitable contributions are typically recorded on Schedule A.
The contribution is limited to $300, and must be made in cash. That said, it opens the door to charitable deductions for any taxpayers normally taking the standard deduction. Even if your total itemized deductions total less than the standard deduction, this provision still enables you to deduct up to $300 given to charity.
Employer Payments of Student Loans
Some employers have established so called “section 127 plans”, that help their employees pay off student loans as part of their compensation package. In addition to a monthly paycheck, employers sponsoring such a plan might agree to kick in a couple hundred bucks a month toward student loan payments. Sometimes the funds are added to an employee’s paycheck, other times the funds are paid directly to the employee’s student loan servicer.
In either case, such compensation is considered taxable in the eyes of the IRS. Until the CARES Act, that is. Until January 1, 2021, the CARES Act stipulates that such payments up to a total of $5,250 are not includable as income to employee beneficiaries. Anything beyond that amount is considered taxable income.
This is a wonderful benefit to employees participating in such programs. It also means that they cannot deduct student loan interest, though.
That covers most of the CARES Act opportunities for individuals. Hope it was helpful! Please comment below with anything I missed.