CARES Act - Tax Opportunities in 2020
Our previous article, Breaking Down the CARES Act, overviews a few of the important planning topics created. We continue by further reviewing a number of the tax planning opportunities that may prove beneficial to you.
To start with, the Internal Revenue Service has delayed the filing deadline for tax year 2019 from April 15th, to July 15th. The primary benefit of this move is to allow taxpayers who may owe money more time should they be financially impacted by the effects of the COVID-19 pandemic. Filers who expect to receive a refund of any size are encouraged to file as soon as they can as the IRS has not indicated that they are changing the way or timeframe in which they process refunds.
Another change by the IRS regards how estimated tax payments will be handled for 2020. Previously estimated tax payments were due quarterly; however, the new schedule extends the dates to allow more time: Quarters 1 & 2 are due July 15th, Quarter 3 on September 15th and Quarter 4 on January 15th of 2021. Locally, states oversee adjusting their specific filing and due dates as need be. For example, Illinois has also delayed their tax filing date to July 15th, but differing from the Federal Government, they have made no changes to their estimated tax payment schedule. You should consult with your tax advisor to determine how these changes will impact or benefit you.
Owners of retirement accounts may also see relief as they can bypass Required Minimum Distributions for 2020. Owners who have already distributed money from their retirement accounts have a one-time option to return the money to the account with no tax consequences, only if they do so within 60 days of the original distribution. By limiting or dictating their own account withdrawals rather than taking the amount produced by IRS formulas, individuals can be more strategic in their tax planning this year.
Some individuals and couples may find themselves in a lower tax bracket by deferring portions or all of this years’ originally planned distribution. This could create an opportunity for an extra year of Roth Conversions. Roth Conversions are a popular planning technique that see funds distributed from a tax-deferred account and placed into a Roth IRA. A Roth IRA is more tax-advantaged as distributions and earnings on the funds can be tax-free if certain criteria are met. These conversions are most effective in years of low income where taxpayers can take advantage of lower tax rates.
Opportunities were also created to allow individuals under age 59 ½ the ability to withdraw up to $100,000 from retirement accounts without the usual 10% pre-mature distribution penalty. Certain stipulations were added to this to ensure that any such withdraw was directly caused by the COVID-19 pandemic: 1) you, your spouse or a dependent were diagnosed with COVID-19, or 2) you have suffered financial consequences as a result, including income or hours reduced through quarantine or furlough, unable to work as a result of childcare shortcomings or issues deemed to be beyond your control. This provision is backdated to include distributions beginning January 1st of 2020. Consult with your tax advisor to ensure that you are eligible for this waiver of penalty prior to taking any distributions.
Loans on 401(k) balances were also bolstered, doubling the amount a plan participant can borrow. For 2020 participants will be allowed to take the lessor of $100,000 or 100% of their balance, up from $50,000 or 50%. Again, this provision is meant to aid those financially impacted by COVID-19, but there are no stipulations put in place to monitor the reason for taking a loan. Any outstanding loans with payments due throughout the remainder of 2020 were granted an additional year to their repayment plan.
All the aforementioned provisions set forth by the CARES Act are intended towards creating greater cash flow flexibility for U.S. taxpayers. Delaying tax payments or allowing greater access to funds will hopefully ensure that more people and families can stay afloat during these tough times, while also stimulating the economy. If you have any questions about the CARES Act or would like to discuss these opportunities for you, please do not hesitate to reach out to a member of the Vantage team as we are more than happy to help!
The facts and opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Where applicable, all data and information has been gathered from sources believed to be accurate such as the internet, nonaffiliated 3rd parties, news articles and professional subscriptions but this information is not warranted to be correct, complete or true. Vantage Financial Partners Limited, Inc. and its agents are not tax advisors or accountants. We strongly encourage you review your tax situation, opportunities and liabilities with your tax advisor before making any changes. This article is not intended as tax advice.