Examining some tax issues related to the virus
This week’s focus is on some tax issues related to the coronavirus. Recognizing that people were told to stay at home to promote social distancing, the federal tax deadline was moved back to July 15 from April 15, and state income taxes also were changed to this date.
Normally, anyone could file an automatic extension that would move your due date back six months until Oct. 15. Under normal conditions, you would be required to estimate how much you were going to owe and send it with the extension request. This year, you do not send in an extension or payment if your return will be filed by July 15. An extension will only be for three months, until Oct. 15.
This year, we also have an unusual rule for people who are required to make estimated payments. Your first-quarter estimate has been pushed to July 15, and the second-quarter estimate is due a month earlier on June 15.
There is a new type of distribution this year known as a coronavirus-related distribution. To qualify, you must have been diagnosed with COVID-19, had a spouse diagnosed, experienced a financial consequence, were unable to get child care or lost work hours to the virus. It is pretty broad, but you cannot just have lost money because of a stock market crash. If you meet these special qualifications, you get additional options.
You may be able to borrow up to $100,000 from a combination of IRAs or employer plans. This must be done in 2020. This distribution is exempt from the 10% early withdrawal penalty if you are under age 59½. You can pay the taxes on the loan over the next three years. You also have the option to repay your qualified account one-third of the borrowed amount over three years.
The maximum amount was increased to $100,000 for this year instead of the normal $50,000. You also may borrow up to 100% of the vested balance.
Doing this should be a last resort. Many people do not save enough for retirement to begin with. They will not be earning a return while the money is loaned out. Probably, the less-savvy money people will do this and not repay the balance. Be very careful if you utilize this option.
Another option the CARES Act has given us to simulate the economy is the ability to suspend required minimum distributions. This is sort of the opposite of other parts of the law. Most parts make cash available to help replace lost income from the virus pandemic. This provision allows you to not take RMDs if you do not need them. This may give your stock portfolio some time to recover losses.
Under the Secure Act, which became law on Jan. 1, the age for RMDs was increased to age 72 for anyone who was not age 70½ by Dec. 31. Whichever law you are under, you do not need to withdrawal RMDs during 2020. If you have already taken your own requirements out and don’t need them, you may roll them back in.
Inherited RMDs do not have to be taken in 2020, but there is no provision to return them to the account. If you are under the five-year rule of taking inherited balance out within five years of a death, 2020 does not count as a year.
Talk to a tax professional to see how any requirements apply to your situation. And make sure that you and your family stay safe.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.