As part of The Coronavirus Aid, Relief, and Economic Security (CARES) ACT in response to the COVID-19 Virus, here is some important but not yet widely-known financial information.
1) ANYONE who would otherwise have a Required Minimum Distribution (RMD) in 2020 will NOT be required to take an RMD in 2020. Of course, you can take an RMD or other distribution from your IRA but it will not be required in 2020.
If someone already took an RMD for 2020, which some people do in the first week of January, they’re likely out of luck. There is no provision in the bill that allows someone to put back a distribution taken in 2020. The distribution will still be treated as such and therefore taxable.
For those who won’t need their RMDs and have them set up automatically, now is a good time to call your advisor or service provider and suspend their RMDs for 2020 – IF you don’t want/need to take it. If you do want it, then there’s no need to take any action.
It should be noted that the RMD suspension for 2020 also applies to inherited (“death”) IRAs. An inherited (“death”) IRA is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies. An inherited IRA is also known as a “beneficiary” IRA.
2) Although all of the details have not yet been made available, there is a provision in the CARES Act which will allow folks that are under age 59.5 the ability to withdraw up to $100,000 of funds from their traditional IRA or 401K without the usual 10% early withdrawal penalty. Of course, normal income taxes will be due – HOWEVER, you can pay the federal income taxes over the next 3 years!
Yes, it’s true that the taxable distribution (and the resultant taxes due) is spread out over three years, but it can be treated as taxable income in 2020 if desired. This might make sense if 2020 is a low-income year and you want to pay the tax bill when you are in a lower bracket (perhaps caused by losing a job).
There is a “hardship” wording in the provision, but my guess would be that will be a very flexible definition (stay-tuned). It is also unclear whether this provision can be used for penalty-free ROTH conversions for folks (under age 59.5) who do not use non-IRA funds to pay the taxes. And rather than converting these traditional IRAs to a ROTH, some of my clients are considering life insurance as a ROTH IRA alternative due to the fact that life insurance can offer more benefits and flexibility than a ROTH.
Anyway, to be eligible for the exception (the “hardship”), the account owner or their spouse needs to be diagnosed with COVID-19, or they need to or will experience some adverse financial consequences as a result of the pandemic due to being quarantined, laid off, furloughed, have reduced housing, childcare issues, or a number of other reasons (this is the catch-all in my opinion). This exception is incredibly broad as most Americans will be impacted in some way.
Each state will determine the treatment for state income tax purposes. My guess is that some states will follow the federal government while others will not.
3) For sure you have heard about this provision. And it applies to EVERYONE (with income limitations) whether they are affected by COVID-19 or not. But first a WARNING!
As I predicted in my last BLOG POST, the scammers are already out in force on this (and all other COVID-19 fear scams). The IRS is NOT GOING to call or email you to ask for your bank account number so they can deposit your $1,200 check! Don’t let those you care about fall for this (and all other) coronavirus scams.
So #3 is an economic stimulus.
A. The CARES Act also sends a $1,200 stimulus check to eligible adults earning up to $75,000. Couples earning up to $150,000 will receive $2,400. This is based on 2019 adjusted gross income (or 2018 AGI if you haven’t yet filed your 2019 tax return). Eligible families receive an additional $500 for each child under the age of 17.
You can expect a direct deposit CARES Act payment by about April 16, 2020, if the IRS has your bank information.
B. Checks sent via mail will take longer—potentially months—and they will be sent to the address listed on your most recent tax return.
C. You can file a change of address with the IRS if you have moved since then.
The amount starts declining after $75,000 of income for individuals ($150,000 for couples) and phases out completely at $99,000 singles ($198,000 for couples).
D. If you made too much in 2019 to qualify for the rebate but your 2020 income qualifies you for the rebate, you’ll claim it as a credit on your 2020 tax return.
** NOTE: If you made too much in 2019 to qualify for the rebate but lost your job in 2020, you will not receive a rebate check. If your 2020 income qualifies you for the rebate, you can claim the credit when you file your taxes next year.
4) Charitable Deductions Extended. Another change will make a $300 deduction for charitable gifts available to the nine in 10 taxpayers who do not claim itemized deductions on their federal income tax returns. Please share with charities that you care about if you can!!
5) Student Loan Payments
Borrowers can request to delay payments on federal student loans until Sept. 30, 2020.
All federally-owned student loans will automatically have a 0% interest rate until then. Contact your federal student loan servicer to request forbearance.
6) Mortgage, Car and Credit Card debt.
Although not part of the CARES Act, many lenders will work with you to help the financial strain of losing a job or any other financial effect of COVID-19. Should you or someone you care about be in this situation PLEASE reach out to your lender and ask for help earlier rather than later. Don’t be embarrassed should you have a need to reduce/defer payments.
Of course, all of this is on top of the $2.2 TRILLION spending bill that goes along with the CARES ACT!
Not only has federal spending and the deficits increase by virtue of this Act, but with unemployment rising and corporate profits disappearing (at least for the next quarter or two), previously budgeted tax revenues will plummet. And the state and local governments will come under similar distress.
So what do you think is going to future taxes? How can they not go UP??
My book, “Get Me to ZERO” will show you how to prepare for rising taxes by using 7 proven strategies to pay as little as ZERO taxes in retirement. You can get your copy from Amazon by CLICKING HERE.
In any case, whether you are a client of mine or not, please reach out if you think I can be of any help. We’re all in this together and we’ll come out of this together too.
Stay safe and look for opportunities to help your neighbors… Mark