Another year, another year-end wrap up, and what a slog it’s been! Between a global health crisis unlike anything we’ve seen in over a century and the economic uncertainty that came along with it, I think it’s safe to say we’re all eager to say so long to 2020. However, before we do so, we’re going to review a few important provisions of the CARES Act and what they mean for your year-end wrap-up.
Reviewing the CARES Act
The CARES Act, which was signed into law on March 27, 2020, is meant to help contain the economic fallout from Covid-19 and put into place a range of benefits for both businesses and individuals. While several key provisions of the CARES Act already expired in August and September, there are still a few potential benefits that individuals can take advantage of in 2020.
1. 2019 Tax Extension ends on 10/15
To say that this year hasn’t gone smoothly could very well be the understatement of the century. Everything takes longer than usual, including filing and processing income taxes. Thankfully, the IRS issued several extensions for 2019 taxes. First, the usual April filing date for 2019 taxes was bumped back to July, at which point additional extensions were given to those who requested more time to file.
Now, as we round the corner into October, we’re rapidly approaching the final deadline for filing 2019 taxes if you haven’t already done so. Whether you filed for an extension or not, the final filing deadline for 2019 taxes is this next Thursday, the 15th. If you owe the government taxes, it’s almost always better to file on time and pay late as opposed to accruing penalties and fines for not filing on time.
2. Coronavirus-Related Distributions
Another provision of the CARES Act created the opportunity for individuals to take early retirement account withdrawals in the form of Coronavirus-Related Distributions (CRDs) without having to pay a penalty. While it’s difficult to over-emphasize the fact that early retirement withdrawals should generally be avoided, CRDs can still provide an essential financial life-line for folks who are struggling financially during the pandemic.
Under the CAREs Act, CRDs allow individuals to withdraw up to $100,000 from an IRA or workplace retirement savings account without paying the 10% penalty fee that usually applies to early withdrawals made by individuals under the age of 59 ½. However, as is generally true with such withdrawals, they are still taxed at your marginal rate. The good news here is that CRD taxes can be spread out over calendar years 2020, 2021, and 2022 —and you may also repay a CRD within that three year window (in which case the marginal income tax may not be owed but you may have to amend your tax return).
CRD-eligible accounts include:
- Individual Retirement Accounts (IRAs)
- Individual Retirement Annuities
- 401(k) accounts
- 403(b) accounts
- 457(b) accounts
As it stands today, CRDs are only available until 12/31/2020. After this date, the 10% penalty for withdrawing under the age of 59 ½ will be reinstated. Additionally, you should note that employers are not required to participate in CRDs. That means that if you have an employer-sponsored retirement account and are interested in taking a CRD, you should inquire with your employer ASAP.
3. Waiver of RMDs for 2020
The CARES Act also brought major changes to Required Minimum Distributions (RMDs) in 2020. First, the age at which these withdrawals must begin was moved from a confusing 70 ½ to 72 years old. Further, for 2020, all RMDS have been suspended. Because RMDs are calculated as a percentage of the total account value from the previous year (as of December 31st), withdrawing funds when the markets are down takes a disproportionate toll on the total account value. This meant to let retirement accounts recover some of this year’s losses. Finally, if you have already taken your RMD for the year, you can put it back—do it quickly.
4. A few traditional year-end considerations
While almost nothing about 2020 has been normal, that doesn’t mean you should skip your annual review of your savings goals and overall financial standing. You can visit our previous deep dive on end-of-year tax planning and our review of SECURE Act changes in 2020, but to touch on a few points, consider:
- Individual Financial Gifting – As many Americans experience increased financial stress during the pandemic, more and more individuals are taking advantage of the annual gift exclusion, which allows one to gift up to $15,000 in cash or property to as many individuals as you please, or up to $30,000 from a married couple.
- Charitable Giving – End-of-year giving is always a worthy consideration. For 2020, there’s an “above-the-line” deduction available for cash gifts of up to $300 made to charities by individuals who plan to take the standard deduction for tax year 2020. Additionally, cash contribution donation limits for those claiming itemized deductions was changed from 60% Adjusted Gross Income (AGI) to 100% AGI, meaning your charitable dollars can go farther.
- Contributing to a 529 Savings Plan – 529 plans provide a tax-deferred vehicle to save for future education expenses. The 2017 tax bill extended use of 529 funds to K-12 expenses; and now the 2020 SECURE Act has broadened their use even further to include eligible apprenticeship costs. Perhaps more importantly, you can now use tax-free 529 funds to repay up to $10,000 of student loan debt.
Financial planning can always feel stressful even when we aren’t in the midst of a pandemic. Thankfully, we can help. To schedule with one of the top financial advisors in Austin, TX, contact Holdfast Wealth Management today.