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Feature Tax Strategies

Tax Guide Update: Staying Current on the New Rules

Due to the coronavirus pandemic, a number of changes to tax rules have been made.

by Charles Rotblut | May 2020

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

Due to the coronavirus pandemic, a number of changes to tax rules have been made.

 

Since we published our annual tax guide in December, more changes have been announced. To keep you up to date on those changes to the tax rules, we are publishing this unusual mid-year update.

Tax Return and Payment Deadlines Moved

In response to the coronavirus pandemic, the Internal Revenue Service (IRS) revised its deadlines for 2019 and first-quarter 2020 tax payments.

The date for filing 2019 tax returns has been pushed back from April 15, 2020, to July 15, 2020. Likewise, the payment deadline for 2019 taxes is now July 15. This change only applies to federal taxes, not state taxes or local taxes. Check with your state (and local, if applicable,) government to determine if their deadlines have changed.

Those who file an extension for their 2019 taxes are still required to file a return by October 15, 2020. As of early April, this deadline has not changed. An extension is not required if you file by July 15.

The deadline for paying first-quarter 2020 estimated taxes has also been pushed back by three months. Estimated taxes can be paid on July 15 instead of April 15. Second-quarter estimated taxes can also now be paid as late as July 15 (instead of June 15).

No penalties or interest will be charged for those who choose to delay payments until July 15. The deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.

More Time to Make 2019 IRA Contributions

In conjunction with the revised deadline for filing 2019 taxes, the deadline for making 2019 IRA contributions has been pushed back. Taxpayers can now make contributions as late as July 15, 2020. The IRS states, “Because the due date for filing federal income tax returns has been postponed to July 15, the deadline for making contributions to your IRA for 2019 is also extended to July 15, 2020.”

If you have already filed your 2019 tax return but have not contributed the maximum allowed amount to your IRA ($6,000 plus an additional $1,000 for those ages 50 or older), you may have to file an amended return. Because qualified contributions to a traditional IRA reduce your adjusted gross income, an amended return needs to be filed. Contributions to a Roth IRA do not alter your adjusted income since they are made with aftertax dollars. However, an amended tax return would still be needed for a Roth IRA contribution made if the retirement savings contributions credit is claimed, according to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.

If you made contributions during the 2019 and 2020 calendar years, be sure you calculate the total contributions made for the 2019 tax year to ensure you do not go over the limits.

Age Limit on Making Traditional IRA Contributions Removed

Those over age 70½ can now continue to make contributions to traditional IRAs if they have earned income.

Prior to the start of 2020, such contributions were not allowed by those over age 70½; the age limit has been removed by the IRS.

Roth IRA contributions did not have an age limit.

Changes in the Tax Treatment of Charitable Donations

The CARES Act allows for $300 of charitable donations to be deducted above the line for the 2020 tax year. This means the deduction can be claimed regardless of whether you take the standard deduction or choose to itemize.

The cap on deducting cash charitable donations has also been removed. Previously, individuals have been limited to deducting cash contributions equivalent to 60% of their contribution base (typically adjusted gross income). Now they can deduct up to their contribution base for 2020. The CARES Act states, “Any qualified contribution shall be allowed as a deduction only to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer’s contribution base.” We suggested reading IRS Publication 526 to learn more about the rules for charitable giving.

Qualified charitable donations (QCDs) are still allowed for those who are 70½ and older. (A QCD is a donation made to a qualified charity directly from an IRA.) Because there are no required minimum distributions (RMDs), QCDs made in 2020 will not have a tax impact. They will, however, affect future years’ taxes by reducing the size of the IRA and thereby future RMDs. The limit on QCDs is $100,000 per year.

New Rules for RMDs

A combination of actions effect required minimum distributions. The impact on any particular individual depends on their age and wealth.

First, as noted above, RMDs have been waived for 2020. No RMDs have to be taken from a traditional IRA, 401(k), Roth 401(k), SEP IRA or similar type of account. (Roth IRAs were previously and will continue to be exempt from the required distribution rules.) The IRS has yet to address the treatment of inherited IRAs as of press time. The Schwab Center for Financial Research has said that inherited IRAs are exempt from the RMDs this year as well. Joy Taylor, the editor of The Kiplinger Tax Letter, also says the tax practitioners she’s talked to believe this to be the case. It would still be prudent to watch for official guidance from the IRS.

If you already took an RMD this year and want to avoid paying taxes on it, you have 60 days to roll it over to a new IRA. In doing so, understand that only one rollover per 12-month period is allowed. In cases where taxes were withheld from the distribution being rolled over, the IRS requires taxpayers to “use other funds to make up for the amount withheld.” If more than 60 days have passed, you will owe taxes on the distribution from non-Roth retirement accounts. According to Fidelity, the IRS has since clarified that the extension on tax deadlines applies to rollover contributions for which, as Fidelity explains, “the 60-day deadline fell between April 1 and July 14. [Individual investors] can make an eligible rollover contribution on or before July 15, 2020.”

RMDs for 2021 will be determined by the balance of an eligible account [e.g., traditional IRAs, 401(k)s, etc.] at the end of 2020 and your age. To the extent that money is not withdrawn from your tax-deferred retirement accounts this year, the dollar amount for determining your 2021 RMD will increase. Fluctuations in the value of your investments will also have an impact—potentially a bigger one depending on your account balance.

Also impacting your RMDs for 2021 and beyond will be revised life expectancy tables. The proposed tables released in late 2019 assumed a 29.1-year life expectancy for a 70-year-old IRA owner versus the previous expectancy of 27.4 years. Additionally, the proposed uniform life table will be extended to 120 years, up from the current table’s 115 years. Combined, the proposed changes would lead to a 70-year-old retiree’s RMD decreasing from 3.65% of their retirement account’s balance to 3.44% of the account’s balance. These numbers may change once the 2021 tables are released.

You could use the tax savings from not taking an RMD this year and use it to cover the tax cost of doing a Roth IRA conversion if you won’t need the funds for five years. Doing so would lower your RMDs for next year. The “Roth Versus Traditional IRA” InvestoGraphic published in the December 2019 AAII Journal may help you decide whether doing Roth IRA conversion makes sense.

The SECURE Act of 2019 raised the starting age for RMDs to 72 from 70½. The change in age applies to those who turned 70½ on or after January 1, 2020. Those who turned/will turn 70½ in 2020 or later have until April 1 following the year in which they turned 72 to take their first RMD. (If you turned 70½ in 2019, you were required to take a distribution by April 1, 2020. Due to the coronavirus, you are not required to take a second RMD for the 2020 tax year.)

A new 10-year limit on withdrawals for inherited IRAs was instituted by the SECURE Act. IRAs inherited on or after January 1, 2020, must be liquidated by the end of the 10th calendar year following the account owner’s year of death. This provision eliminates stretch IRAs, which previously allowed heirs to stretch withdrawals over the course of their lifetime. For IRAs inherited this calendar year, 2021 counts as year 1 of the 10-year maximum period for taking withdrawals.

Waiver of Early Withdrawal Penalty for Coronavirus

A 10% penalty is typically assessed on withdrawals from retirement accounts made prior to age 59½. The CARES Act waives this penalty for 2020 if a person, their spouse or dependent is diagnosed with the coronavirus or if they experience “adverse financial consequences” as a result of the pandemic. Such events include but are not limited to being quarantined, furloughed, laid off, working reduced hours and being unable to work due to a lack of child care.

The withdrawals are taxable if not repaid (only the early withdrawal penalty is being waived). The tax on such withdrawals can be spread out over a period of three years. The maximum amount eligible for withdrawal is $100,000.

Tax Rebates Are Not Taxable

Many of you may have received the tax rebates by the time you read this, but we’re addressing them because many AAII members have asked us questions about them.

The rebates were specifically described as a “credit” in the CARES Act and will not count as taxable income. They were based on the adjusted gross income (AGI) listed on your 2019 tax return. If you hadn’t filed your 2019 return, then the AGI from your 2018 tax return was used.

There could be a reconciliation to make on the 2020 tax return because this an advance credit. Should the reconciliation show a taxpayer’s eligible rebate to be higher than what they received, the difference will be claimed on the return. Taxpayers who received more than they should have are not expected by tax practitioners to have to pay the difference back. Such situations would occur if a taxpayer’s income fell or rose, respectively, in 2020 relative to 2019.

Kiddie Tax Changed Back to Parent’s Tax Rate

The Tax Cuts and Job Act (TCJA) changed the tax rates assessed on unearned income for children under age 18 (and students up to age 24) to the same as trusts and estates. The SECURE Act contains a provision revoking this change. As a consequence, minors’ unearned income will go back to being taxed at their or their parent’s tax rate, whichever is higher. According to the Kiplinger Tax Letter, the repeal is retroactive and can be applied to both 2018 and 2019 taxes.

More Information

Jamie Hopkins explained the key provisions of the SECURE Act in greater detail in the April 2020 AAII Journal (“The Top SECURE Act Provisions Individual Investors Should Be Aware Of”). Our annual tax guide—published in the December 2019 AAII Journal—lists the income brackets, credits, deductions and limits for the tax items likely to affect most individuals for both 2019 and 2020. For the latest updates on coronavirus tax relief, see the IRS’ special website section at www.irs.gov/coronavirus.

If you have questions about how the changes discussed in this update or in our tax guide apply to your personal situation, we suggest contacting a tax professional. ▪

Discussion

John Quigley from TX posted over 6 years ago:

Of course those of us who paid our RMD over the first three months of the year, and paid withholding taxes on them as well, cannot take them back, really wish they did this cares act in February instead at the end of March. Be that as it may, it enabled me to make some changes to my positions and improved my dividend size for the rest of the year. I also use the RMD to build our joint cash account and invest in some tax free muni funds. I am 75 my wife is 86 we are looking at tax free income in our cash account to help out over the next several years.


Barry C Johnson from TX posted over 6 years ago:

I love the concept of the IRS setting 99.1 as the "expiration date" for older taxpayers. I think I will get my first ever tattoo to have this reminder available for quick reference during tax season. The old man in Catch 22 was much wiser and more accurate than the IRS when he told Yossarian, "The day you die is as old as you will ever get."


David Fleenor from North Carolina posted over 6 years ago:

I took my RMD distribution in February. Even though more than 60 days have elapsed, can I still return the funds to a new IRA by the July deadline?


Jan Sagett from Florida posted over 6 years ago:

I believe one sentence in the section "Changes in the Tax Treatment of Charitable Donations" might possibly be a bit misleading. It states QCDs in 2020 will not have a tax impact. I had already made partial RMDs and also QCDs before the legislation was enacted. It is my understanding that my QCDs will in fact reduce the taxable amount of those RMDs. Any thoughts?


Charles Rotblut from IL posted over 6 years ago:

David - There is a 60-day deadline on rollovers. To request an extension, you would have to meet one of the requirements. For more information, see this FAQ from the IRS.

Jan - Everything I've read so far says that because there are no RMDs this year, QCDs will not reduce your taxable income for 2020. The reason being that because your RMDs are $0, you're not offsetting anything by making the QCD.

-Charles


Jan Sagett from Florida posted over 6 years ago:

Charles, thanks very much for your reply. However, my RMDs in 2020 are not zero, since I withdrew several thousand dollars from my IRA before the law was changed. I believe that will constitute taxable income, and my QCDs before the law was changed should reduce that taxable income, no? Do these circumstances affect your thinking at all? Thanks again.


Brian Richards from Rhode Island posted over 6 years ago:

Your article states that to avoid being taxed on the part of an RMD that was taken, the amount should be rolled into a new IRA. Can it be rolled back into the IRA from which it was taken?


Charles Rotblut from IL posted over 6 years ago:

Jan - The deadline for taking RMDs is generally December 31. Since the amount for this year that must be taken by Dec 31, 2020, is $0, the rule is being interrupted as no RMDs for the entire year. I have not seen any guidance implying otherwise. I would suggest contacting a tax professional to see if they would say otherwise.

Brian - The cleanest way is to do a rollover into a new IRA account or another IRA account if you own more than one and haven't taken distributions from the other IRA. There isn't much guidance on putting the distribution back into the same IRA, but the IRS does make a reference to putting the distributions back into the same IRA in its FAQ on rollovers:

Tax consequences of the one-rollover-per-year limit Beginning in 2015, if you receive a distribution from an IRA of previously untaxed amounts:

You must include the amounts in gross income if you made an IRA-to-IRA rollover in the preceding 12 months (unless the transition rule above applies), and
You may be subject to the 10% early withdrawal tax on the amounts you include in gross income.
Additionally, if you pay the distributed amounts into another (or the same) IRA, the amounts may be:
treated as an excess contribution, and
taxed at 6% per year as long as they remain in the IRA.

I would check with your brokerage firm and a tax professional to be sure.

-Charles


Jan Sagett from Florida posted over 6 years ago:

Thanks, Charles.


Charles Rotblut from IL posted over 6 years ago:

Since there are questions about RMDs and the rules are confusing, I want to share what long-time AAII contributor "https://www.forbes.com/sites/juliejason/2020/04/16/why-the-2020-rmd-suspension-is-not-fair-to-all/#4fd9af9d740a">Julie Jason wrote on Forbes about the rules after speaking with IRS spokesperson Eric Smith.

“If your rollover period hadn’t expired before April 1, you have until July 15 to complete the rollover,” said Smith. “Thus, someone who took their required distribution in February or March has, if they choose, until July 15 to roll it back into their IRA or an eligible retirement plan. Someone who turned age 70.5 in 2019 and waited until February or March to take their 2019 RMD could also qualify for rollover relief.”

If you have additional questions, I would suggest speaking to a tax professional.

-Charles


Mike Lahart from Illinois posted over 6 years ago:

Re QCDs: Are QCD distributions which would have been part of a now nonexistent RMD now taxed until they are claimed as an itemized deduction, or is the QCD still an above the line non-taxed item as it was in past years?


Bob Davis from TX posted over 6 years ago:

I presume that the restriction of not allowing contributions to donor advised funds to be used for QCDs is still in place. Correct?


Charles Rotbut from IL posted over 6 years ago:

Mike - QCDs taken this year will reduce the RMDs for future years by lowering your IRA balance by the amount donated. There is no impact on 2020 taxes.

Bob - I haven't seen anything that would suggest that the prohibition of using QCDs to fund donor advised funds has changed.

-Charles


Marilyn B. from Illinois posted over 6 years ago:

I am the trustee of my late husband's trust, which hold his IRA. I plan to waive the RMD and roll over that amount to a Roth, using the tax savings on the RMD to help pay for the tax on the conversion. As I understand it, the Five-year Rule restricting distributions from the Roth does not apply since my husband had begun taking RMDs before he died. However,I don't want to complicate things for myself or successor trustees if IRS rules are unclear about this or other inherited IRA matters. Should I forget the conversion?


Michael from Florida posted over 6 years ago:

Would it be prudent to still take a RMD for 2020 because if not then the RMD for 2021 will be more due to the artificially higher balance?


Richard from Indiana posted over 6 years ago:

For what it's worth, Vanguard is also telling clients that inherited IRA RMDs are waived for this year. I can't say for sure but assume they've done their own independent due diligence.


Reynolds from New York posted over 6 years ago:

May husband and wife who file a joint return make a $600 contribution, or each make $300 contributions to the same charity?


Charles Rotblut from IL posted over 6 years ago:

Marilyn-It may make sense for you to sit down with a tax professional and/or an estate attorney to determine what the best course of action for you to take is.

Reynolds-I haven't seen very much regarding joint filers, so I'm going on the basis that is still $300. Here is what the CARES Act says:

‘‘(22) CHARITABLE CONTRIBUTIONS.—In the case of taxable years beginning in 2020, the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the taxable year.’’

-Charles


Dave from Florida posted over 6 years ago:

If there is no RMD taken this year then If you make a QCD this year is it taxable as a distribution


Charles Rotblut from IL posted over 6 years ago:

Dave,

Making a QCD this year will not have any impact on your 2020 taxes. It will reduce the balance of your IRA and thereby reduce your RMDs for future years.

-Charles


Marilyn B. from IL posted over 6 years ago:

Thanks Charles and Richard. I will seek more help before deciding.


Gary from Colorado posted over 6 years ago:

Charles, I'm older than 72. Can I take up to the $100,000 withdrawal from my self-employed 401K plan and repay it within 3 years, with no tax applied? Thanks


Charles Rotblut from IL posted over 6 years ago:

Gary,

Here is what the IRS says:

In general, section 2202 of the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions. It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

I haven't seen any age limits, but I'd check with a tax professional to be sure.

-Charles


John from Virginia posted over 6 years ago:

Charles, I am 76 and my wife is 72. Each of us have IRAs. I continued to work until age 76, and made contributions to my employer's 401k plan. Upon retirement, I rolled the 401k into my existing IRA. I know there are no RMDs for 2020, and am looking at 2021 for QCD procedures. As I understand the situation, I cannot make a QCD as a part of required RMD until any amount contributed to my IRA after age 70 has been taken as a charitable contribution. Do I understand this correctly? -John


Charles Rotblut from IL posted over 6 years ago:

John,

If I'm understanding your situation correctly, it sounds like you made a 401(k) contribution and then rolled over the account to an IRA. I suggest speaking to a tax professional about this. What I can tell you is that the law is intended to prevent double-dipping, meaning to prevent someone from making a deductible contribution and then getting the QCD benefit on the same amount.

Jamie Hopkins discussed QCDs and post-70 IRA contributions in last month's Journal as part of his SECURE Act article.

You may also find this Nerd's Eye View post on QCDs and post-age 70 contributions to be helpful.

Hope this helps,

Charles


CHARLES M from NY posted over 6 years ago:

I've recently inherited an IRA, so I'm starting to think through the issues associated with the new 10-year distribution rule. To optimize wealth 10+ years from now, it appears that taking roughly equal distributions from this beneficiary IRA till my own IRAs' RMDs kick in at 72 is slightly better (0.5%) than waiting till year 10 and having the whole thing taxed at a high marginal rate unless the long-term real growth of my portfolio is roughly 9%/yr or more (unlikely). Any thoughts on the issue?


DAVE G from WA posted over 6 years ago:

Charles, the statement in the article that says: "(If you turned 70.5 in 2019, you were required to take a distribution by April 1, 2020. Due to coronavirus, you are not required to take a second RMD for the 2020 tax year.)" Is not correct according to a recent IRS ruling: https://www.irs.gov/pub/irs-drop/n-20-51.pdf If you turned 70.5 in 2019 and did not pay the 1st RMD in 2020 it is not due until 2021, along of course with your second and third RMD.


CHARLES M from NY posted over 6 years ago:

Dave G, as you read in IRS N-20-51, you're not required to take EITHER your 'late' 2019 RMD or your normal age-71 RMD in 2020 if you turned 70.5 in 2019. N-20-51 also advises you have till August 31, 2020 to reverse any RMD you took by doing a rollover, potentially back in to the same account, which is good news for for those IRA holders who took RMDs in early 2020 and missed the normal 60-day rollover window to undo it after CARES was enacted. See section III.C. Further, also good news, if you repay it to the account it came from, it won't count against the 1-rollover-every-12-months rule. Note that if you took a distribution in-kind the accounting gets messy if you don't repay or roll it over in-kind; this is to keep you from scraping off market gains while the assets are outside of a tax-deferred account. See IRS pub 590-A. Lastly, the CARES act waived a requirement to take RMDs in 2020, it did not defer them. So you don't have to take, in your example, three RMDs (for '19, '20 and '21) in 2021, just your normal annual RMD.


CHARLES R from IL posted over 6 years ago:

The IRS published Notice 2020–51 Guidance on Waiver of 2020 Required Minimum Distributions yesterday.

I have not had a chance to read through it yet. The one part I did look has good news for retirees. RMDs taken in January can now be rolled over into an IRA by Aug 31.

Extension of 60-day deadline for rollover of certain distributions. To assist plan participants who have already received distributions in 2020, the Treasury Department and the IRS, pursuant to § 402(c)(3)(B), are extending the 60-day rollover period for any payments described in section III.A and section III.B of this notice so that the deadline for rolling over such a payment will not be before August 31, 2020. For example, if a participant received a single-sum distribution in January 2020, part of which was treated as ineligible for rollover because it was considered an RMD, that participant will have until August 31, 2020, to roll over that part of the distribution. In addition, the Treasury Department and the IRS, pursuant to § 408(d)(3)(I), are extending the 60-day rollover period for IRA distributions in 2020 that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, so that the deadline for rolling over such distributions will not be before August 31, 2020."

-Charles


RUSS S from PA posted over 6 years ago:

Regarding IRA to Roth conversions, can we assume that (assuming no tax changes between now and year end) no matter who gets elected, that there will be no significant changes to the personal income tax brackets until the 2022 tax year? I'm assuming that the new congress, and whoever is president in 2021, could/would not retroactively change taxes back to the beginning of 2021 once the tables have been issued by the IRS in late 2020. Is that correct?


CHARLES R from IL posted over 6 years ago:

Hi Russ, There are too many variables to make the assumption. Just off the bat, it's going to depend on who wins the White House and which party has control of the Senate. Then any change would depend on how much cooperation occurs in the Senate. On of all this, the various special interests are going to do their best to influence any change to the tax code. -Charles


DAVID E from PA posted over 5 years ago:

It is strange that announcements of the $300 allowance for charitable donations are never accompanied by the statement,"($600 for joint returns)", which is generally what I have read with other rules. I assume the $300 above the line deduction is per person, but you know what that may make me. It would be nice to know if I'm correct before 2021. The lack of clarification started with the IRS and has not been revised by them.


CHARLES R from IL posted over 5 years ago:

David, Here is what the draft instructions to IRS Form 1040 say about taking the deduction:

"Enter the total amount of your contributions on line 10b. Don't enter more than $300."

-Charles


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