As we all try to keep ourselves, our loved ones, and our communities safe from the coronavirus (COVID-19) pandemic, you may be wondering about some of the recent tax changes that were part of a tax law passed on March 27.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act
contains a variety of relief, notably the “economic impact payments” that will
be made to people under a certain income threshold. But the law also makes some
changes to retirement plan rules and provides a new tax break for some people
who contribute to charity.
Waiver of 10% early distribution penalty
IRAs and employer sponsored retirement plans are established to
be long-term retirement planning accounts. As such, the IRS imposes a penalty
tax of an additional 10% if funds are distributed before reaching age 59½.
(However, there are some exceptions to this rule.)
Under the CARES Act, the additional 10% tax on early
distributions from IRAs and defined contribution plans (such as 401(k) plans)
is waived for distributions made between January 1 and December 31, 2020 by a
person who (or whose family) is infected with COVID-19 or is economically
harmed by it. Penalty-free distributions are limited to $100,000, and may,
subject to guidelines, be re-contributed to the plan or IRA. Income arising
from the distributions is spread out over three years unless the employee elects
to turn down the spread-out.
Employers may amend defined contribution plans to provide for
these distributions. Additionally, defined contribution plans are permitted
additional flexibility in the amount and repayment terms of loans to employees
who are qualified individuals.
Waiver of required distribution rules
Depending on when you were born, you generally must begin taking
annual required minimum distributions (RMDs) from tax-favored retirement
accounts — including traditional IRAs, SEP accounts and 401(k)s — when you
reach age 70½ or 72. These distributions also are subject to federal and state
income taxes. (However, you don’t need to take RMDs from Roth IRAs.)
Under the CARES Act, RMDs that otherwise would have to be made
in 2020 from defined contribution plans and IRAs are waived. This includes
distributions that would have been required by April 1, 2020, due to the
account owner’s having turned age 70½ in 2019.
New charitable deduction tax breaks
The CARES Act makes significant liberalizations to the rules
governing charitable deductions including:
- Individuals can claim a $300 “above-the-line” deduction
for cash contributions made, generally, to public charities in 2020. This
rule means that taxpayers claiming the standard deduction and not itemizing
deductions can claim a limited charitable deduction. - The limit on charitable deductions for individuals that
is generally 60% of modified adjusted gross income (the contribution base)
doesn’t apply to cash contributions made, generally, to public charities
in 2020. Instead, an individual’s eligible contributions, reduced by other
contributions, can be as much as 100% of the contribution base. No
connection between the contributions and COVID-19 is required.
Far beyond
The CARES Act goes far beyond what is described here. The new
law contains many different types of tax and financial relief meant to help
individuals and businesses cope with the fallout.
© 2020