2020 IRA Changes
2020 IRA Changes Tom takes a look at some IRA changes that came out of the new SECURE Act signed back in December 2019. Give it a watch or if…
October 4th, 2021
This week’s entry is a continuation of my effort to provide you with some last-minute filing tips for those few remaining 2020 returns on extension.
What I want you to remember are the many alternatives recent legislation provided for taxpayers who took early distributions from IRAs or qualified plans. The opportunities provided by these laws can help your client:
What provisions am I describing?
In essence, the provisions of the CARES Act provide that the coronavirus rises to the level of a disaster for persons impacted by the pandemic.
Distributions must have occurred after January 1, 2020 and before December 31,2020 for the CARES Act provisions to apply.
If you are concerned as to what degree your client may have been impacted by the coronavirus, here are the rules:
PL 116-136, §§2202(a)(1) and (a)(4)(A)(4): DEFINITIONS.—For purposes of this subsection— (A) CORONAVIRUS-RELATED DISTRIBUTION.—Except as provided in paragraph (2), the term ‘‘coronavirus-related distribution’’ means any distribution from an eligible retirement plan made— (i) on or after January 1, 2020, and before December 31, 2020, (ii) to an individual—
(I) who is diagnosed with the virus SARS– CoV–2 or with coronavirus disease 2019 (COVID– 19) by a test approved by the Centers for Disease Control and Prevention,
(II) whose spouse or dependent (as defined in §152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or
(III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of childcare due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary.
Definition (III) should be the one which impacts many, if not all, of your clients.
In addition to these rules, the Consolidated Appropriations Act of 2020 (CAA) (PL 116-93) continued the penalty free withdrawal provisions and ability to spread out the reporting of the income over three years (and also to potentially reinvest the withdrawal within three years) for 2021, but only for disasters which were non-COVID and withdrawals were made no later than June 30, 2021. Additional rules apply and may be reviewed here.
If you determine your client may benefit from one or more of the provisions outlined, there are several factors you may wish to consider in wrapping up their 2020 filing:
Form 8915-E is used to report qualified disaster distributions, the decision to report the income ratably or to report repayments during the three-year period.
One last planning tip. You may have clients who tell you they made traditional IRA contributions during 2020 but were forced to withdraw those deposits during the year. Treating the deposits as though they never occurred, or as non-deductible contributions may also help to minimize the tax impact of same-year withdrawals.
I wish you luck during these waning days (finally) of the 2020 filing season. After you’ve had a chance to refresh a bit, don’t forget to register for our virtual Fall Tax School sessions or webinars so you can prepare yourself for the next round of fun starting up again in just three short months.
By Tom O’Saben, EA
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