As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax.
So how do you qualify? In other words, what’s a coronavirus-related distribution?
Early distribution basics
In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10% early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10% tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses
Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10% additional tax that otherwise generally applies to distributions made before you reach age 59½.
What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover.
In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:
- Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
- Experiences adverse financial consequences as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
- Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
- Be unable to work due to a lack of childcare because of COVID-19;
- Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours;
- Have pay or self-employment income reduced because of COVID-19; or
- Have a job offer rescinded or start date for a job delayed due to COVID-19.
As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance.
© 2020 Covenant CPA
As governments around the globe mobilize to defend their populations from the novel coronavirus (COVID-19), criminals are also mobilizing — to fleece people. These opportunists have already found ways to use the fear and chaos associated with the pandemic to enrich themselves. But you can protect yourself and your business.
Phishing emails that promise valuable information about the virus have been circulating for weeks. Fake COVID-19 websites loaded with malware have also popped up everywhere. And as many Americans start working from home, often on vulnerable home networks and devices that lack the latest security updates, hacking incidents are becoming more common.
The federal government’s plan to send checks to Americans to help boost the economy will almost certainly bring scammers out in force. The Federal Trade Commission has already warned that crooks may try to convince people they must pay a fee to receive their checks from the government — which isn’t true.
So how do you protect yourself or your business in these troubled times? Here are a few essentials:
Let phone calls go to voicemail. The best way to fight off phone scammers is to not answer the phone if you don’t recognize the number. But if you do answer, be wary of anyone making promises about, for example, interest-free loans or mortgage payment forbearance. If you need financial help, contact government agencies, charities and financial-service providers directly.
Keep your inbox clean. Along the same lines, exercise caution when opening emails, particularly if you don’t recognize the sender’s name. (Keep in mind, however, that hackers can hijack a friend’s account and send malicious emails to you in that person’s name.) Right now, scammers are likely to use enticing subject lines such as “Cure for COVID-19” or “Make big $$$ working from home.” If you open one of these emails by mistake, don’t click on any links or attachments.
Beware of charity fraud. Charity schemes are a time-tested method for stealing money from generous individuals and companies that just want to help. While you’re encouraged to donate money to organizations fighting COVID-19 and assisting its victims, give only to reputable charities you know. If you aren’t familiar with a nonprofit, ask for its tax ID number and verify it with the IRS. You’re also encouraged to research the organization on watchdog sites such as Charitynavigator.com and Charitywatch.com.
Just say “no”
Most Americans are pulling together to fight COVID-19. However, some criminals view the pandemic as an opportunity to profit, so you need to maintain healthy skepticism. If you’re suspicious, hang up, delete or just say “no.”
© 2020 Covenant CPA
Businesses across the country are being affected by the coronavirus (COVID-19). Fortunately, Congress recently passed a law that provides at least some relief. In a separate development, the IRS has issued guidance allowing taxpayers to defer any amount of federal income tax payments due on April 15, 2020, until July 15, 2020, without penalties or interest.
On March 18, the Senate passed the House’s coronavirus bill, the Families First Coronavirus Response Act. President Trump signed the bill that day. It includes:
- Paid leave benefits to employees,
- Tax credits for employers and self-employed taxpayers, and
- FICA tax relief for employers.
Tax filing and payment extension
In Notice 2020-18, the IRS provides relief for taxpayers with a federal income tax payment due April 15, 2020. The due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020.
Important: The IRS announced that the 2019 income tax filing deadline will be moved to July 15, 2020 from April 15, 2020, because of COVID-19.
Treasury Department Secretary Steven Mnuchin announced on Twitter, “we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”
Previously, the U.S. Treasury Department and the IRS had announced that taxpayers could defer making income tax payments for 2019 and estimated income tax payments for 2020 due April 15 (up to certain amounts) until July 15, 2020. Later, the federal government stated that you also don’t have to file a return by April 15.
Of course, if you’re due a tax refund, you probably want to file as soon as possible so you can receive the refund money. And you can still get an automatic filing extension, to October 15, by filing IRS Form 4868. Contact us with any questions you have about filing your return.
Any amount can be deferred
In Notice 2020-18, the IRS stated: “There is no limitation on the amount of the payment that may be postponed.” (Previously, the IRS had announced dollar limits on the tax deferrals but then made a new announcement on March 21 that taxpayers can postpone payments “regardless of the amount owed.”)
In Notice 2020-18, the due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.
As of this writing, the IRS hasn’t provided a payment extension for the payment or deposit of other types of federal tax (including payroll taxes and excise taxes).
This only outlines the basics of the federal tax relief available at the time this was written. New details are coming out daily. Be aware that many states have also announced tax relief related to COVID-19. And Congress is working on more legislation that will provide additional relief, including sending checks to people under a certain income threshold and providing relief to various industries and small businesses.
We’ll keep you updated. In the meantime, contact us with any questions you have about your situation.
© 2020 Covenant CPA