An overview of recent coronavirus-related legislation
In the last few months, there has 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). 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. Since then, the IRS has issued a series of Notices, including Notices 2020-18, 2020-23, 2020-50 and 2020-51 providing a variety of extensions and guidance related to the CARES Act. This article summarizes the tax relief provisions and IRS deadline extensions—and what they could mean to you.
The package of legislation and recent IRS 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, nor 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 Form 1040 was extended from April 15, 2020 to July 15, 2020. In addition, taxpayers who owe taxes will not have penalties and interest assessed, if the payment was received by July 15, 2020. 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 Form 1040 and provide payments due for that tax return.
- Recovery rebates for individuals
A rebate was authorized for qualified individuals. The rebate amount is equal to $1,200 ($2,400 for married filing joint 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 joint 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.
- 2019 IRA contributions
The IRS also extended the deadline to make 2019 contributions to eligible IRAs (Traditional, Roth, IRA for Minors, Contributory) from April 15, 2020 to July 15, 2020. Accordingly, customers can make IRA contributions and designate them as 2019 contributions through July 15, 2020.
Bottom line: Customers can make eligible IRA contributions through July 15, 2020 that apply toward the 2019 tax year.
- IRA and Qualified Retirement Plan (QRP) distributions
Distributions of up to $100,000 from IRAs or other qualified retirement plans, such as 401ks, are available for individuals who are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively as COVID-19)—or those with a spouse or dependent who is diagnosed with COVID-19, as well as those with one or more of the following adverse financial impacts from COVID-19:
- Quarantine, furlough, layoff, or a reduction in work hours
- Unable to work due to lack of childcare
- Closing or reducing hours of your business
- Reduced pay or self-employment income
- Rescinded job offer or delayed job start date
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 may 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, nor count against your one rollover per year limit. For more information on eligible distributions and how the IRS expects individuals to apply repayments to income inclusions, see IRS Notice 2020-50.
Bottom line: Individuals adversely impacted by the COVID-19 are permitted to make distributions of up to $100,000 from IRAs or other qualified retirement plans without the 10% early distribution penalty. These distributions are not subject to the mandatory 20% tax withholding and may be repaid over a three-year period from the date of the distribution.
- Qualified Retirement Plan loans
Section 2202 of the CARES Act also provided for plan loans, suspension of payments and extensions of loan terms. The maximum amount of qualified retirement plan loans that can be taken due to the coronavirus increased to the entire vested balance of the plan or no more than $100,000.
To qualify for this benefit, loans must be disbursed by September 22, 2020. Loans disbursed after that date do not qualify for the increased loan amount benefit. In addition, the repayment of plan loan payments due in 2020 can be delayed for one year. The one-year delay is taken into account to accrue interest and determine the five-year limit on outstanding loans. Please note that not all employers may extend this benefit.
Bottom line: Qualified retirement plan loans up to $100,000 can be taken if disbursed by September 22, 2020 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 make RMD distributions.
Individuals who wish to repay 2020 RMD distributions to their retirement account have until the later of August 31, 2020 or 60-days from the distribution date, to repay the distribution and have it treated as a 60-day rollover. For more information about RMD repayments, see IRS Notice 2020-51.
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 for charitable contributions they make in 2020 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 can deduct 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
Certain federal student loans are being placed in an automatic six-month forbearance which allows students to temporarily stop making their monthly loan payment. This forbearance will suspend the payments and charge 0% interest until September 30, 2020, but borrowers can still make payments if they choose. For more information about student loan relief, see this Federal Student Aid announcement.
Bottom line: Certain federal student loan payments and interest accruals are suspended until September 30, 2020.