Your Financial Future: Taxes and the coronavirus
This week, we are going to discuss some of the tax issues from the coronavirus.
Recognizing that people were told to stay at home to promote social distancing, the federal tax deadline was moved back to July 15 from April 15. Pennsylvania state income taxes were also changed to this date.
Normally, anyone could file an automatic extension that would move your due date back six months until Oct. 15. Under normal conditions you would be required to estimate how much you were going to owe and send it with the extension request. This year you do not send in an extension or payment if your return will be filed by July 15. An extension will only be for three months until Oct. 15.
This year we also have an unusual rule for people who are required to make estimated payments. Your first quarter estimate is pushed now due until July 15, and the second quarter estimate is due a month earlier on June 15.
There is a new type of distribution this year known as coronavirus-related distribution. To qualify, you must have been diagnosed with COVID-19, had a spouse diagnosed, experienced a financial consequence, were unable to get childcare or lost work hours to the virus. It pretty broad, but you cannot just have lost money because of a stock market crash. If you meet these special qualifications, you get some additional options.
You may be able to borrow up to $100,000 from a combination of IRAs or employer plans. This must be done in 2020. This distribution is exempt of the 10% early withdrawal penalty if you are under age 59陆. You can pay the taxes on the loan over the next three years. You also have the option to repay your qualified account one third of the borrowed amount over three years. The maximum amount was increased to $100,000 for this year instead of the normal $50,000. You may also borrow up to 100% of the vested balance.
Doing this should be a last resort. Many people do not save enough for retirement to begin with. They will not be earning a return while the money is loaned out. Probably the less savvy money people will do this and not repay the balance. Be very careful if you utilize this option.
Another option that the Cares Act gives us to simulate the economy is the option to suspend required minimum distributions (RMDs). This is sort of the opposite of other parts of the law. Most parts make cash available to help replace lost income from the virus pandemic. This provision allows you to not take RMDs if you do not need them. This may give your stock portfolio some time to recover losses.
Under the Secure Act, which became law on Jan. 1, the age for RMDs was increased to age 72 for anyone who was not age 70 陆 by Dec. 31. Whichever law you are under, you do not need to withdrawal RMDs during 2020. If you have already taken your own requirements out and don鈥檛 need them, you may roll them back in.
Inherited RMDs do not have to be taken in 2020, but there is no provision to return them to the account. If you are under the five year rule of taking inherited balance out within 5-years of a death, 2020 does not count as a year.
Talk to your tax professional to see how any requirements apply to your situation. Make sure that you and your family stay safe.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.