There has been much attention paid to key parts of the law that deal with loans to small businesses, and the difficulties that many have encountered in actually obtaining these loans, but there are other provisions that affect a broad spectrum of taxpayers. We wish to highlight some important aspects of the law with respect to retirement accounts and charitable giving:
• Many may recall that during the financial crisis the Federal government offered relief by waiving the Required Minimum Distribution (RMD) rule. Given the hardships faced by many taxpayers today, the CARES Act revives this exception. You are now required to start taking these distributions at age 72,
recently moved up from age 70 ½. For 2020, the RMD is optional. You may take this distribution if you need to, but it is not required. You may still use up to $100,000 to contribute to charities,
however doing so in 2020 is tax-advantageous only if you itemize your deductions. Rest assured that we will evaluate whether it makes sense for our clients to take a distribution, in whole or part, or reverse a distribution that was made earlier in the year.
• If you are under the age of 59 ½, you may withdraw up to $100,000 (or the vested balance if smaller) from your IRA or 401(k) without incurring a penalty. However, this withdrawal is a taxable event and must be included in your taxable income. Nevertheless, the tax that is owed can be paid over three years and if you repay the distribution back into the appropriate retirement account within three years, no tax will be due.
• The amount you are allowed to borrow from your retirement account has also been increased to $100,000. If you already have an outstanding loan from a retirement account or qualified plan, repayment of the loan will be suspended for a year. The new rules regarding these distributions apply to those who have been adversely affected by COVID-19. The definition of an individual affected by COVID-19 is very broad and is determined by the IRS; it includes those individuals who were diagnosed with the virus, or have a spouse or dependent who was diagnosed; those who have suffered financial losses through losing their jobs, or reduced employment hours/furloughs; business owners whose firms have been forced to close; and those who have had other financial difficulties.
• The limit on deductions for charitable contributions has been increased from 60% of adjusted gross income to 100%. However, the contributions must be made in cash (as opposed to securities or other
assets) and cannot be made to a donor advised fund or to a private foundation. For those who do not itemize their deductions, but instead claim the standard deduction, they may deduct up to $300 for cash contributions made to public charities.
• The tax calendar has shifted back three months. All tax filings due by April 15th have been extended to July 15th. This includes payments of balances due and estimated tax payments due not only on April 15th but those due on June 15th as well. Most states, including Massachusetts, have adopted this delayed filing and payment deadline; however, if you are not a Massachusetts resident, please check your state’s requirements. There is one note of caution: if you cannot file your return by July 15th, you must file an extension request on or before that date.
As the saying goes, “Your check is (maybe) in the mail!” The Treasury will send $1,200 checks to single filers with adjusted gross incomes under $75,000. For to joint return filers, with adjusted gross incomes under $150,000, the checks will be for $2,400. There will also be a payment for $500 for each eligible child age 17 or under. Those filers whose incomes exceed the $75,000 and $150,000 limits can still receive a partial payment; however, no checks will be issued to single filers whose income exceeds the $99,000 level and joint filers exceeding the $198,000 level. The government will use your 2019 return to determine the amount of the payment; if your 2019 return has not yet been filed, your 2018 return will be used to determine the amount you are eligible to receive. To conclude this update with an even better piece of news – the stimulus checks will not be taxable!