In addition to the recovery rebates provided to individuals, supplemental unemployment benefits and payroll assistance given to small businesses, the third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided other important tax relief to individual taxpayers.
No 10% additional tax for coronavirus-related retirement plan distributions
Typically, a distribution from a qualified retirement plan made to an individual less than 59 ½ years old is subject to a 10% additional tax unless the distribution meets certain other exceptions. The CARES Act provides that the 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000. A coronavirus-related distribution is any distribution, made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan made to a qualified individual.
A qualified individual is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
3 Year Rollover provisions for coronavirus-related retirement plan distributions
Typically, distributions from retirement plans are considered taxable income unless rolled over or contributed back to a qualified plan within 60 days. Under special rules provided by the CARES Act, any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made. Coronavirus-related distributions not rolled over may be included in income ratably over a 3-year period.
$100,000 Plan Loans now Available with Delayed Repayment Terms
Qualified individuals, as defined above, may take plan loans up to the lesser of $100,000 (increased from $50,000) or 100% (increased from 50%) of their vested account balance. This temporary increase covers loans taken during the 180-day period beginning on the date of law enactment (i.e. between March 27th and September 22nd). Qualified individuals with an existing loan may delay for one year any loan repayments that are due between March 27th, 2020 and December 31st, 2020.
RMD requirement waived for 2020
The CARES Act provides that the Required Minimum Distribution (RMD) requirements do not apply for calendar year 2020 to 1) all IRA accounts, including SEP and SIMPLE IRAs, and inherited IRAs, (2) defined contribution plans, such as 403(a), 403(b), 401(a) and 401(k), (3) Federal Thrift Savings Plan (TSP), and (4) 457(b) plans from government employers. This waiver is for RMD’s attributed to 2020 and includes first-year RMD’s attributed to 2019 that could be taken by April 1, 2020. Not all retirement accounts are eligible for suspension of the RMD’s, including defined benefit plans, non-governmental 457(b) plans, and annuitized annuities held in an otherwise eligible plan.
There are additional CONSIDERATIONS FOR QUALIFIED CHARITABLE DISTRIBUTIONS (QCD).
The rules around QCDs have not changed. IRA owners age 70½ and older can still donate up to $100,000 of assets directly to qualified charities (excluding donor advised funds). With the suspension of RMD’s for 2020, the benefit of using a QCD to reduce adjusted gross income is diminished. If you have non-IRA assets available for charitable giving, it may be more beneficial to donate directly to the charities. If your giving level allows for itemizing deductions, and you intend to suspend your RMD, donating directly to charity may provide a more tax-efficient solution.
For CARES Act changes to your retirement plan, be sure to check with your Plan administrator to make sure you qualify for the special provisions.
$300 above-the-line charitable deduction
For individuals who do not itemize deductions, a deduction for qualified charitable contributions of up to $300 from gross income is allowed. The contributions need to be made in cash and to a qualified charitable organization.
Modification of limitations on individual cash charitable contributions during 2020
For individuals that continue to itemize deductions, the charitable contribution deduction for cash contributions to certain charitable organizations (such as churches, educational organizations, hospitals, and medical research organizations) is no longer limited to 60% of a taxpayer’s Adjusted Gross Income. The CARES Act provides that qualified contributions are disregarded in applying the 60% limit on cash contributions of individuals. Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of the individual’s contribution base over the amount of all other (such as non-cash contributions) charitable contributions allowed as deductions for the contribution year.
Qualified contributions are charitable contributions if they are paid in cash during calendar year 2020 to a charitable organization and the taxpayer has elected to apply this provision with respect to the contribution. However, contributions to a “supporting organization” or a donor advised fund are not qualified contributions.
Tax-excluded education payments by an employer temporarily include student loan repayments
The CARES Act adds to the types of educational payments made by employers that are excluded from employee gross income “eligible student loan repayments” made before January 1, 2021. The payments are subject to the overall $5,250 per employee limit for all educational payments. An employee’s gross income still does not include up to $5,250 per year of employer payments, in cash or kind, made under an educational assistance program for the employee’s education (but not the education of spouses or dependents).