Today, April 15th, normally marks the annual tax filing deadline for taxpayers.  But, of course, this isn’t a normal year and the deadline has been extended to July 15th.  Rather than filing your tax returns today, you may want to take the opportunity to do some tax planning.  Two major tax laws, the SECURE Act and the CARES Act have been passed in the past four months and afford plenty of ways to reduce your tax bill both for 2020 and many years to come.  See some of the opportunities below on the new CARES Act and our earlier post on the SECURE Act.  Or contact us to review your situation and offer recommendations.

Tax Planning and the CARES Act

Amid an unprecedented situation here in the U.S. and around the globe, the federal government has stepped in to support the economy with fiscal stimulus. The $2 Trillion bill known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law a couple weeks ago and has presented significant planning changes for 2020.

Free Money

Many Americans will receive a check or direct deposit from the Treasury beginning this week – $1,200 for single folks, and $2,400 for couples, along with $500 per dependent. The payments will be issued based on your most recently filed tax return (2018 or 2019) and your reported adjusted gross income (AGI).

The credit phases out starting at $75,000 in income for single filers, and $150,000 for joint filers and is reduced by $5 for every $100 you exceed that threshold. What’s interesting about the credit is that it’s an advance of a 2020 income tax credit. So even if your most recent tax return shows income above the threshold, you may still get a credit when you file your 2020 taxes in 2021 if your income declined enough.

Notably, the bill does not include a claw-back of the credit for those who receive a payment but see their income rise above the phase out in 2020. The Treasury Department indicates that payments will be going starting this week. For most individuals, no action is required in order to receive the recovery rebate. It will be direct deposited if you have authorized a direct deposit or direct debit for your most recently filed tax return. Otherwise, a check will be mailed to your last known address.

Required Minimum Distribution Relief

Perhaps one of the most significant changes in the bill was a hiatus from Required Minimum Distributions for 2020. The CARES Act allows taxpayers – both IRA account owners and those who inherited IRA accounts, to skip the 2020 required distribution, creating a significant planning opportunity.

A couple of factors come to mind when considering whether you should still take an IRA distribution in 2020. First, if your cash flow needs require it, this is a moot point. But if they don’t, there may be an opportunity to skip your required minimum distribution and do a Roth IRA conversion instead. This would keep your taxable income stable but allow you to shift a chunk of your savings to a Roth. The recent passage of the SECURE Act has made Roth conversions an even more attractive planning strategy.

And what if you’ve taken your RMD already? Account owners may have some options to deposit the money back into the IRA under the 60-day rollover rule. And if you’ve been impacted by Coronavirus, there may be an option to pay back the distribution anytime over the next three years. Unfortunately, these rules don’t apply to beneficiaries. Those who’ve taken RMDs from an inherited retirement account aren’t afforded the same latitude to pay it back.

Early Withdrawals

Many savers may be impacted in a different way – loss of income, furloughs, or hit with unexpected costs due to the pandemic. For many Americans without an emergency fund, their retirement accounts may be their only alternative. The CARES act allows for up to $100,000 in early (pre-59 ½) withdrawals from a retirement account without the 10% tax penalty that normally applies. This provision applies to those diagnosed with COVID-19, are experiencing financial hardships, lack childcare, or have been furloughed, among other reasons.

The act also allows taxpayers receiving Coronavirus-Related Distributions to re-pay them over a  three year period and spread the income over multiple tax years.

Everything else

There are a variety of other provisions in the CARES Act and in recent IRS guidance that can impact planning decisions. Here’s a list of key items to be aware of:

  • There’s a special $300 charitable deduction for those who do not itemize their deductions in 2020 that allows for a small tax benefit.
  • For those that do itemize deductions, cash contributions to charity can now equal your AGI – allowing you to fully offset your income for 2020.
  • The 2019 Federal and Michigan income tax filing deadline is now July 15th, as is the payment deadline. Quarterly estimates due April 15th and June 15th are now due July 15th as well.
  • 2019 IRA and Roth IRA contributions can be made up until July 15th
  • Federal Student Loan payments are suspended – not required – through September 30th.
  • Many Small Businesses are eligible for forgivable loans from the federal government. These can be very valuable.  See more..
  • Unemployment benefits have been expanded, the typical ‘waiting week’ has been eliminated, and coverage has been extended.
  • The employer portion of payroll taxes (and self-employment taxes) has been deferred – allowing the 2020 payments to be split evenly between 2021 and 2022.

Planning Takeaways

  1. Slow Down your 2019 Tax Return?

If you haven’t filed your 2019 income taxes yet, you may want to take a quick look at your income. If your 2018 income allowed a credit, but 2019 did not, it may make sense to delay filing for now to receive the credit.

  1. Start Reviewing your 2020 Income Tax Plan Now:

With required distributions waived, and many mutual funds and stocks at a capital loss due to the recent volatility, 2020 represents a significant opportunity to optimize your tax situation. Taxpayers who are already receiving RMDs can re-evaluate their 2020 income and devise a plan for a more tax-efficient future. Likewise, those with inherited retirement accounts can see if skipping the withdrawal makes sense – letting the funds continue to grow tax-deferred.

Workers and non-retirees who see a significant decrease in their income this year should also consider Roth conversions. With the market significantly off it’s all-time highs, taking advantage of a ‘relatively’ lower income year can make sense. Remember, the 2017 tax cuts expire the end of 2025 and tax rates will rise unless Congress acts.

  1. Take a Breath – You’ve got options

Those experiencing immediate cash needs have been relieved of a common speed bump – the 10% early withdrawal penalty. If you need to pull from retirement savings prior to 59 ½, this relief can be very helpful.

  1. Consider Giving Back

Many charities and non-profits that help those in need are struggling. The recent tax change allows taxpayers who would otherwise take the standard deduction to get a $300 write-off for charitable gifts. Those over 70 ½ can also give funds from their retirement accounts tax-free using a Qualified Charitable Distribution. There are many ways you can use your savings to help make a difference.  Your local United Way likely has a fund set up to help those most in need today.

  1. Watch out for Scams

Unfortunately, there will be bad actors that try to use recent events to exploit those in need. Be wary of telemarketers and e-mails. The IRS will not call you asking for direct deposit information, demanding immediate payments, or reach out without providing appeal opportunities. Most communications from the IRS will come by postal mail.

At Vintage, we stand ready to assist our clients in navigating the continually changing tax and investment landscape.  Our office is open, though most all of our staff is working remotely.  Feel free to contact one of our Senior Financial Planners today.