For many Americans, July has become the new April—at least for tax season. The pandemic brought on by COVID-19 and the federal government’s efforts to ease the economic pain it has caused pushed the annual federal income tax filing deadline to midsummer.
With unemployment at a historic high, many of us—even some of those who usually file well before the traditional April 15 deadline—are just getting started in thinking about filing those 2019 taxes.
When the pandemic began hitting hard in the U.S. around the early part of March, Congress passed the first of several financial relief bills, known as the Coronavirus Aid, Relief and Economic Security (CARES) Act, which among other things, extended the tax filing deadline and created some important tax relief provisions. The Internal Revenue Service (IRS) recently released a list of frequently asked questions and answers to help taxpayers understand how the changes, enacted on March 27, affect them.
Here are some of the law’s features that you’ll want to know about:
- First, there are several changes to some eligible retirement plans, including IRA and 401(k)-style plans. The CARES Act allows you to take up to $100,000 in distributions this year if you were impacted by COVID-19. That includes a temporary waiver of the 10% early withdrawal penalty for those under age 59 ½. You’ll have to pay income taxes on any such withdrawal but you can pay the related taxes over a three-year period. Or you can repay the full amount withdrawn within three years. Note that a withdrawal could lead to higher Medicare premium payments, make it harder to qualify for certain other tax breaks, or make your Social Security benefits partly taxable.
- An alternative to a withdrawal is a loan from your 401(k) account. The CARES Act raises the limit to as much as $100,000, assuming your employer goes along with it. Repayment requirements also were loosened and you get the advantages of modest fees, an easy application process, and the ability to repay the amount at any time. Any interest you pay would go to you via your account and not to the bank or other lending institution. Keep in mind that, if you leave your job, the loan would have to be repaid fairly soon.
- The CARES Act also waived the required minimum distribution (RMD) for this year. Of course, you can take the distribution if you want to or need the money but the waiver allows you to keep the money in the plan and not be taxed on it for 2020 and it also enables you to avoid having to sell plan assets at depressed market values.
- There’s also a new deduction available that relaxes the rules on charitable deductions imposed in the tax changes of a few years ago. You can now deduct up to $300 in charitable donations ($600 for married couples) even if you take the standard deduction and don’t claim itemized deductions. If you itemize your taxes, you can deduct a lot more–up to 100% of your adjusted gross income (the previous limit was 60%), assuming the donations go to a public charity.
- And more good news: stimulus payments of up to $1,200 per individual, $2,400 for married couples and $500 for your dependents under 17, won’t be taxed and they won’t be deducted from your regular refund next year. If your income was too high to qualify for a stimulus payment this year, you still may be able to get one if your 2020 income drops to the income threshold (Adjusted Gross Income $75,000 and $150,000 if married filing jointly) to receive a full stimulus payment.
- If you are receiving unemployment checks due to coronavirus, be aware that these benefits are taxable by the federal government and some states. Therefore it’s a good idea to elect the tax withholding option to avoid any surprises at tax filing time next year.
- The CARES Act also allows employers and people who are self-employed to postpone paying those applicable FICA payroll taxes until Dec. 31, 2021 and Dec. 31, 2022. Just know that half of the total deferred must be repaid by each of those dates. The tax deferral period began on March 27 and runs until Jan. 1, 2021.