The COVID-19 pandemic has turned many lives upside-down. Aside from lifestyle changes, the pandemic has inspired significant changes to our laws. Some of the most impactful changes have been in the field of tax. The following is a summary of what I believe to be the most significant COVID-19-related tax changes as of May 14, 2020. Please feel free to contact me if you have any questions regarding these changes and how they apply to you.
EXTENSIONS TO IRS DEADLINES
The first set of changes applies to IRS deadlines for filing of returns and payment of taxes. The IRS has extended several deadlines until July 15, 2020, including (but not limited to) the following:
· Filing of 2019 income tax returns and payment of 2019 federal income tax has been extended to July 15, 2020.
· Payment of 2019 self-employment tax has been extended to July 15, 2020.
· Payment of 2020 estimated income tax (both the April 15 and June 15 installments) has been extended to July 15, 2020.
· Estate, gift, and generation-skilling transfer tax returns and payments otherwise due April 1 or later (i.e. estate returns otherwise due April 1, 2020 or later) has been extended to July 15, 2020.
· IRA contribution deadline for 2019 contributions has been extended to July 15, 2020.
· Deadline for contributions to heath savings accounts for 2019 has been extended to July 15, 2020.
· Deadline to file an extension is now July 15, 2020. Taxpayers will be granted an automatic extension for filing an income tax return to October 15 by filing the proper paperwork by July 15. NOTE: the deadline to file a return on extension is NOT extended past October 15, 2020.
CHANGES TO RMD RULES FOR RETIREMENT PLANS
There have also been several key changes relating to defined contribution retirement plans (such as an IRA, 401(k) plan, or 403(b) plan). Normally, a participant in a defined contribution retirement plan must withdraw a required minimum distribution (RMD) annually after reaching age 70 ½ or 72 (depending upon whether the participant falls under the “old rules” or the new rules put in place in December 2019 under the SECURE Act, which goes beyond the scope of this update). However, the CARES Act waives required minimum distributions for 2020. This will allow taxpayers to leave the RMD in the account, thereby generating continuing tax-deferred growth and eliminating a taxable withdrawal for tax year 2020.
If a taxpayer has already withdrawn a RMD in 2020, the taxpayer may be able to rollover the RMD into another retirement plan under the extended 60-day rollover rule instituted under the CARES Act. If the taxpayer has taken the RMD within 60 days, the RMD may roll it over into another retirement plan without penalty (tax-free). The rollover period for taxpayers who withdrew their RMD after February 1, 2020 is extended until July 15, 2020. Only one distribution per year may qualify under the 60-day rollover rule. Therefore, if a taxpayer has taken multiple distributions from different accounts, only one may qualify for rollover, penalty free. Note that the 60-day rollover rule does not apply to a non-spouse beneficiary of an inherited IRA.
Despite the waiver on RMDs for 2020, you may still need to access funds in a retirement account for cash-flow needs. If this is the case, there are special rules under the CARES Act providing for expanded distribution options and favorable tax treatment for coronavirus-related distributions. Qualified individuals may take advantage of these tax breaks.
You are a qualified individual if:
1. You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
2. Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
3. You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
4. You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
5. You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.
Note that most taxpayers can qualify under Items 3, 4 or 5 above. A qualified individual may withdraw up to $100,000 in coronavirus-related distributions from a retirement plan in 2020. There will be no ten percent penalty on early withdrawals for individuals less than age 59 ½. For withdrawals made in 2020, the income from distributions may be spread ratably over a three year period. For example, if a qualified individual makes a $15,000 withdrawal from her retirement account in 2020, she may claim $5,000 of income in 2020, $5,000 in 2021, and the remaining $5,000 in 2022. Taxpayers may opt to include all of the withdrawal as income in 2020.
In addition, a qualified individual may repay a coronavirus-related distribution, without penalty, within three years from the date the distribution was withdrawn. This effectively allows for “borrowing” from retirement plans without penalty, though there are reporting requirements in order to ensure that the distributions are not taxable to the individual.
Please note that the tax laws have been rapidly changing with new and emergency legislation, and we anticipate many more changes to come. There are many considerations that go into tax planning and decisions. It is important to discuss your unique situation with a tax advisor so you can make fully-informed decisions.
Laura practices almost exclusively in the field of estate planning, trust and probate law. She is a board-certified specialist in Estate Planning, Trust and Probate Law and licensed real estate broker. She can be reached by email at laura@lauranelsonlaw.com or by telephone at (530) 617-1692.