An overview of recent coronavirus-related legislation
In the last week, there’s been a flurry of activity in Congress and from the Internal Revenue Service (IRS) that could impact your tax planning and retirement accounts.
On March 18, 2020, Congress passed the Families First Coronavirus Response Act (Families First Act). On March 20, 2020, the IRS issued Notice 2020-18, providing a variety of extensions. This activity was followed by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act ), the third phase of the legislative response to the coronavirus pandemic enacted on March 27, 2020. This article summarizes the tax relief provisions and IRS deadline extensions—and what they might mean for you.
The package of legislation and notices contains measures impacting all sorts of businesses and personal finance concerns. This article only addresses the personal federal tax and retirement account aspects and does not cover the other provisions included in the CARES Act or state-specific relief that may have also been issued. As always, please consult your tax advisor if you have questions about the CARES Act, IRS deadline extensions, and state-specific relief in terms of how they may impact your specific situation.
Here are eight of the principal changes that may affect you:
- 2019 federal income tax filing and payment deadlines
The statutory due date for filing federal income tax returns (i.e. Form 1040) is extended from April 15, 2020 to July 15, 2020. In addition, taxpayers who owe taxes will not have penalties and interest assessed, provided that payment is received by July 15. Please refer to the IRS FAQ page for more information on the IRS deadline extensions.
Bottom line: Taxpayers have until July 15, 2020 to file 2019 federal income tax returns and provide payments due for that tax return. The IRS nevertheless encourages taxpayers that are due a refund to file as soon as possible to ensure that refunds are not delayed.
- Recovery rebates for individuals
A rebate was authorized for qualified individuals. The rebate amount is equal to $1,200 ($2,400 for married filing jointly taxpayers). In addition, individuals who have qualifying child dependents can increase their credit amount by $500 for each child.
The rebate amount begins to phase out for individuals whose 2019 adjusted gross income exceeded $75,000. For married filing jointly taxpayers, the phaseout begins when adjusted gross income exceeds $150,000; for head of household taxpayers, the phaseout amount is $112,500. Moreover, individuals who are not US persons for tax purposes, those who do not have a US tax identification number (SSN), and those who can be claimed as dependents by someone else are not eligible to receive the rebate. The law also excludes an estate or trust from receiving the rebate.
Bottom line: Qualified individuals within income thresholds will receive a rebate.
Important: The IRS will never call you directly or send an email asking for you to verify information in order to receive a rebate payment. Please follow the IRS instructions located here for more information on how the IRS will process rebate payments and what steps, if any, you may need to take in order to receive the payment.
- 2019 IRA contributions
The IRS also extended the deadline to make 2019 contributions to eligible IRAs (Traditional, Roth, IRA for Minors, Contributory, and Beneficiary IRAs) from April 15, 2020 to July 15, 2020. Accordingly, customers can make IRA contributions and designate them as 2019 contributions through July 15.
Bottom line: Customers can make eligible IRA contributions through July 15, 2020 that apply toward the 2019 tax year.
- Qualified Retirement Plan (QRP) distributions
Individuals who were diagnosed with COVID-19 — or those with a spouse or dependent who was diagnosed as well as those who had adverse financial effects due to quarantine, furlough, layoff, or reduction in work hours because of the coronavirus—can distribute up to $100,000 from IRAs or other qualified retirement plans. These distributions are not subject to the 10% early distribution penalty, nor are qualified plan distributions for these purposes subject to the mandatory 20% tax withholding. This provision applies to qualified distributions made between January 1, 2020 and December 31, 2020. For QRP accounts, the plan sponsor may rely on a participant’s certification that the conditions for making this distribution are met.
In addition, amounts withdrawn from a retirement account for this reason are includible in income over a three-year period. For example, an individual who withdraws $100,000 in 2020 as a qualified distribution would include one-third of that amount in income for each of the 2020, 2021, and 2022 tax years.
Individuals who take these distributions will also have three years to repay the amount to the retirement account, if they choose to do so. The repayments will be treated as rollovers and do not count against the individual’s annual contribution limits.
Bottom line: Individuals adversely impacted by the coronavirus can make distributions up to $100,000 from IRAs or other qualified retirement plans without the 10% early distribution penalty. These distributions will also not be subject to the mandatory 20% tax withholding.
- Qualified Retirement Plan loans
The maximum amount of qualified retirement plan loans that can be taken due to the coronavirus is increased to the entire vested balance of the plan or no more than $100,000. In addition, the repayment of this loan can be delayed for one year. The one-year delay is taken into account to determine the five-year limit on outstanding loans.
Bottom line: Qualified retirement plan loans up to $100,000 can be taken with a one-year delay in repayment.
- Waiver of 2020 Required Minimum Distribution (RMD) requirements
RMD requirements are suspended for 2020. This means that individuals required to make distributions from their IRA or qualified retirement plan in 2020 do not have to do so.
Bottom line: Eligible individuals (including those who turned 70½ in 2019 with their first RMD due April 1, 2020) are not required to take an RMD for 2020.
- Charitable contributions
For 2020 tax reporting, taxpayers can deduct up to $300 of charitable contributions even if they do not itemize deductions on their tax return. This modification does not apply to 2019 tax returns filed in 2020.
Bottom line: Individuals who claim the standard deduction, rather than itemized deductions, can receive a deduction up to $300 for qualified charitable contributions made in 2020. Individuals who claim itemized deductions can continue to claim those deductions on Schedule A.
- Student loans
For tax year 2020, employers can make tax-deductible contributions to pay down an employee’s student loan debt. Contributions, subject to the maximum employer education assistance limitation of $5,250, are tax deductible for the employer and tax free to the employee, meaning these payments are excludable from gross income during the tax year 2020.
Federal student loan payments are suspended for six months, as is the interest accrual on federal student loans. Borrowers seeking loan forgiveness receive six months’ credit toward the loan forgiveness while payments are suspended.
Bottom line: Payments for qualified education loans during the 2020 year are excludable from gross income subject to a limit of $5,250. Federal student loan payments and interest accruals are suspended for six months.