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Qualified individuals affected by COVID-19 may be able to withdraw up to $100,000 from their eligible retirement plans, including IRAs, between January 1 and December 30, 2020.
These coronavirus-related distributions aren't subject to the 10% additional tax that generally applies to distributions made before reaching age 59 and a half, but they are still subject to regular tax.
Taxpayers can include coronavirus-related distributions as income on tax returns over a three-year period. They must repay the distribution to a plan or IRA within three years.
Some plans may have relaxed rules on plan loan amounts and repayment terms. The limit on loans made between March 27 and September 22, 2020 is raised to $100,000. Plans may suspend loan repayments due between March 27 and December 31, 2020.
The law defines a qualifying person as someone who:
Has tested positive and been diagnosed with COVID-19
Has a dependent or spouse who has tested positive and been diagnosed with COVID-19
Experiences financial hardship due to them, their spouse or a member of their household:
Being quarantined, furloughed or laid off or having reduced work hours
Being unable to work due to lack of childcare
Closing or reducing hours of a business that they own or operate
Having pay or self-employment income reduced
Having a job offer rescinded or start date for a job delayed
Qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren't changed. Administrators can rely on an individual's certification that they're a qualified person.
Required minimum distributions:
People who already took a required minimum distribution from certain retirement accounts in 2020 can now roll those funds back into a retirement account.
The 60-day rollover period has been extended to August 31, 2020.
Under the relief, taxpayers with required minimum distributions from certain retirement plans can skip them this year. Distributions that can be skipped were due in 2020 from a defined-contribution retirement plan. These include a 401(k) or 403(b) plan, as well as an IRA. Among the people who can skip them are those who would have had to take the first distribution by April 1, 2020. This waiver does not apply to defined-benefit plans.
You should call us now at 215.550.3636, Monday through Sunday, between 1000am and 1000pm, with any questions you may have concerning IRA distributions or any other retirement matters.
With the latest batch of payments, the IRS has now issued more than 8.7 million unemployment compensation refunds totaling over $10 billion. In late May, the IRS started sending refunds to taxpayers who received jobless benefits in 2020 and paid taxes on that money before the American Rescue Plan went into effect. That law waived taxes on up to $10,200 in unemployment insurance benefits for individuals earning less than $150,000 a year.
The first batch of these supplemental refunds went to those with the least complicated returns (single taxpayers with no dependents), and batches are supposed to continue throughout the summer for more complicated returns. On July 13, the IRS said it sent out 4 million more payments via direct deposit and paper check, and another 1.5 million went out starting July 28. According to an igotmyrefund.com forum and another discussion on Twitter, some taxpayers who filed as head of household or as married with dependents started receiving their IRS money in July or getting updates on their transcript with dates in August.
Here's a quick recap of what we know:
The tax break is only for those who earned less than $150,000 in adjusted gross income and for unemployment insurance received during the pandemic in 2020.
The $10,200 is the amount of income exclusion for single filers, not the amount of the refund. The amount of the refund will vary per person depending on overall income, tax bracket and how much earnings came from unemployment benefits.
Most taxpayers don't need to file an amended return to claim the exemption. But if you think you're now eligible for deductions or credits based on an adjustment, check the recent IRS release for the list of who should file an amended return.
If the IRS determines you are owed a refund on the unemployment tax break, it will automatically correct your return and send a refund without any additional action from your end.
Not everyone will receive a refund. The IRS can seize the refund to cover a past-due debt, such as unpaid federal or state taxes and child support.
Refunds started going out in May and will go out in batches through the summer as the agency evaluates tax returns. More complicated returns could take longer to process.
The IRS is doing the recalculations in phases, starting with single filers who are eligible for the up-to-$10,200 tax break. It will then adjust returns for those taxpayers who are married and filing jointly, who are eligible for the up-to-$20,400 tax break.
Refunds will go out as a direct deposit if you provided bank account information on your 2020 tax return. A direct deposit amount will likely show up as "IRS TREAS 310 TAX REF." Otherwise, the refund will be mailed as a paper check to whatever address the IRS has on hand.
The IRS will send you a notice explaining the corrections within 30 days of when a correction is made.
Some states, but not all, are adopting the unemployment exemption for 2020 state income tax returns.
The new stimulus package passed by Congress in response to the COVID-19 pandemic the Coronavirus Aid, Relief, and Economic Security (CARES) Act—does much more than provide enhanced unemployment benefits and other forms of financial support. The new law includes a bevy of tax breaks designed to help both individual taxpayers and businesses. This article will primarily focus on what impact the Act has on your individual clients.
The CARES Act provides a wide range of tax benefits for individual taxpayers ranging from personal stimulus rebates to charitable deductions for non-itemizers to relief for 401(k) and IRA participants.
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Stimulus rebates: By now, most taxpayers are aware if they filed tax returns for either 2019 or 2018 they will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples and up to $500 for each child under age 17. Note: Social Security recipients and railroad retirees who are otherwise not required to file a tax return are also eligible and will not be required to file a return.
But the payment amount is phased out based on the taxpayer’s adjusted gross income (AGI). For single filers, the phase-out occurs between $75,000 of adjusted gross income (AGI) and $99,000. For joint filers, the total phase-out occurs at $150,000 and $198,000 of AGI.
Charitable donations: When catastrophes occur, taxpayers are often inclined to donate funds to charities. However, due to changes in the Tax Cuts and Jobs Act (TCJA), many taxpayers no longer qualify for charitable deductions because they are claiming the standard deduction rather than itemizing. Among other changes, the TCJA essentially doubled the standard deduction and reduced or eliminated benefits of several itemized deductions.
Now the CARES Act authorizes a deduction of up to $300 for non-itemizers who claim the standard deduction. Furthermore, the tax law generally limits charitable deductions for monetary donations to 60 percent of the taxpayer’s AGI, but this cap is removed for contributions made in 2020.
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Required minimum distributions: Generally, individuals who have funds in a qualified retirement plan, like a 401(k), or an IRA must begin taking required minimum distributions (RMDs) after reaching a specified age. The recently-enacted SECURE Act changed the starting age from the year after the year the account owner reached age 70½ to age 72, beginning in 2020.
The new law waives this requirement for all RMDs, including inherited accounts, in 2020. It doesn’t matter whether or not the taxpayer has been affected by the pandemic.
IRA rollovers: Usually, distributions from an IRA are subject to tax unless the same amount is rolled over into another IRA within 60 days. This rollover is exempt from tax liability. Now the new law provides more flexibility for IRA owners.
Under the CARES Act, an individual has up to three years to complete a rollover for distributions relating to COVID-19 complications. Similar rules apply to distributions from qualified plans.
Early withdrawals: If a taxpayer withdraws funds from a qualified plan or IRA before age 59½, he or she is assessed a 10 percent tax penalty, in addition to the regular income tax that is owed. However, the Internal Revenue Code contains several key exceptions to this general rule (e.g., distributions made on account of disability). Now there’s another exception to add to the list.
The new law allows an account owner to take COVID-19 related distributions of up to $100,000 in 2020 without incurring the tax penalty. In service distributions from qualified plans are permitted. Note that this may apply to any combination of qualified plan accounts or IRAs.
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Retirement plan loans: The CARES Act liberalizes the current tax rules for retirement plan loans made to qualified individuals made between March 27, 2020 and September 23, 2020. Specifically, the new law
• Increases the maximum loan amount from $50,000 to $100,000; and
• Allows participants to take the full amount of their vested benefit as a loan. Normally, the loan amount is limited to 50% of the vested balance.
The CARES Act also extends the due date for loan repayments that are due between March 27, 2020 and December 31, 2020 for one year as well as extending the maximum repayment period of five years.
Student loans: The CARES Act eases the burden on individuals who are obligated to repay student loans. For 2020, employers may provide up to $5,250 in student loan repayment benefits on a tax-free basis. Therefore, an employer could assist with loan payments and the employee won’t be responsible for any tax on those amounts.
In addition, borrowers can defer payment on qualified loans to September 30, 2020. Congress may subsequently grant an additional extension.
