by Trent Krassow
In addition to free money and tax extensions, the Federal government has also made some other provisions to offset the impacts of Coronavirus on households across the country. While the big items are certainly the expected stimulus payments and the automatic tax filing and payment extensions, a few other elements of recent COVID-19 related legislation may be of interest to you or your family:
1. Expansion of unemployment benefits
2. Ability to take distributions from retirement accounts without penalty in certain situations
3. Suspension of Required Minimum Distributions (RMD’s)
4. Additional tax benefits for charitable giving
Unemployment
It is certainly our hope that you will not need this information, but the reality is that many businesses will struggle to keep staffing up due to decreased demand or other COVID-19 related disruptions this year. In fact, in the last week alone, we have seen unemployment claims jump across the country as businesses small and large try to shed expenses to match falling revenues and hopefully live to fight another battle. In response to this, the Federal government has allocated additional funds to extend the unemployment benefits offered by most states from 26 to 39 weeks. While the process of filing for unemployment is still handled through each state, additional funds from the Federal government allow for the extended payment period. Furthermore, the funds stipulate an additional $600 per week on top of the state determined amount (varies by state) for the first four months of benefits.
Retirement Account Distributions
Under normal circumstances, the money you put away for retirement in an IRA, 401k, or similar account is essentially “untouchable” until you reach retirement age – 59 ½. While there have long been some exceptions to this general rule, the CARES Act expands those exceptions to include a distribution of up to $100,000 taken during 2020 specifically to offset the impacts of Coronavirus experienced by an individual Be careful here! This is not a blanket exemption, and you still have to include it in your income and pay tax on those funds (but you can do so over a three year period instead of all at once), but may be able to skip the usual 10% penalty (the usual penalty is on top of your normal tax rate.) You qualify in general if:
1. Total distributions for the year are limited to $100,000 AND
2. All distributions are taken in 2020 AND
3. The distributions are deemed to be Coronavirus related
Note that all three conditions must be met, not just one or two. It’s that last one that needs some clarification. Here are the criteria for Coronavirus related:
1. Diagnosed with the disease by a CDC (Center for Disease Control and Prevention) approved test
2. Your spouse or dependent who live with you is diagnosed as described above
3. You experience adverse financial impacts as a result of being quarantined, furloughed, or laid off, or your working hours are reduced specifically due to Coronavirus or being unable to work due to a lack of child care resulting from coronavirus or government order pertaining to coronavirus, or the closing or operational reduction of business due to the same causes.
That’s a mouthful. It can probably be broadly interpreted, but we always recommend documenting your circumstances carefully in case the IRS wants to ask questions.
Suspension of Required Minimum Distributions (RMD)
If you have contributed to an IRA or 401k or another tax-deferred retirement account while working, you are generally required to take a minimum distribution each year once you reach age 72 (or 70 ½ if you reached that age before January 1, 2020.) Here is the logic: you received a tax deduction for your contributions to that account for 40 years while working, so the government wants to tax you on that money, and they certainly don’t want you to die and pass all of that money to your heirs, possibly tax-free! You can see a more in-depth discussion of this topic in our article about charitable giving to satisfy RMD’s.
The problem with this requirement is that it sometimes forces you to take a distribution at the wrong time:
1. Maybe you sold a property or had some other unusual event putting you into a higher tax bracket than usual – taking more money from your retirement account just rubs salt in the wound, especially if you don’t really need the money (due to selling that piece of property.) Why take a distribution if you don’t need the money? Answer: the “R” in RMD stands for required!
2. This situation can be even worse when the stock market, which is where most retirement savings lives, is down. In a recession, as looks likely as a result of coronavirus related restrictions, taking a distribution while the market is down means you are paying tax on the distributions and also not maximizing the profit on the assets you have to sell.
So, for 2020, no RMD’s!
Charitable Giving
It is in times like this that charities across the country will be more needed, and ironically, this is when charities struggle the most to get donations (because normal donors have to tighten their own purse strings.) To combat this and encourage giving by the public, Congress has allowed for an “above the line” deduction for charitable giving of $300.
“Above the line”? What does that mean? Under normal tax law, you either get a standard deduction or if your itemized deductions are higher, you can take the itemized deductions. Thus, if you give to charity, but your giving is not more than your standard deduction, you normally would not get any tax benefit for such giving. This new provision (for 2020 only) allows you to deduct up to $300 of charitable giving even if you do not itemize your deductions for 2020. There are also some special provisions if you plan to give more than 60% of your Adjusted Gross Income, so we should probably talk if that is the case for you.
Some states, including Colorado, also allow for some benefit for charitable giving, even without itemizing your deductions, so don’t forget to give this year, regardless of the tax benefits – charities around the country will likely need your support. Find one that aligns with your values and is known to do good work, and help where you can, whether financially or through volunteering.