Coronavirus Aid, Relief, and Economic Security (CARES) Act creates two new tax benefits for donors to non-profits; up to $300 per taxpayer ($600 for a married couple) in annual charitable contributions. This is available only to people who take the standard deduction (for taxpayers who do not itemize their deductions). It is an “above the line” adjustment to income that will reduce a donor’s adjusted gross income (AGI), and thereby reduce taxable income. The second change lifts the cap on how much a donor can deduct in charitable gifts in a single year. Until the 2017 Tax Cuts and Jobs Act (TCJA), individuals could immediately deduct gifts valued at no more than half their adjusted gross income (AGI), with the excess deductible in future years. The TCJA boosted the cap to 60 percent of AGI, and the CARES Act eliminates the cap entirely for 2020. Thus, a donor can fully deduct gifts equal to as much as 100 percent of their AGI this year. Good news for folks who make charitable donations but are not able to itemize their deductions on the federal return. Questions? Contact Kim Kelly today.
COVID-19 RETIREMENT WITHDRAWALS
Now under normal circumstances, being unemployed is not considered a valid reason to take an early retirement plan withdrawal, and tapping an IRA or 401(k) prior to age 59-1/2 in that scenario would usually trigger a 10% federal penalty on the sum removed. Now don’t forget about the states too… they also have an early distribution penalty, and you get to pay income taxes on the money. What's changed is that savers who have been negatively impacted by the COVID-19 crisis can now remove up to $100,000 from an IRA or 401(k) without facing that 10% early withdrawal penalty. This includes people who test positive for COVID-19, as well as those who are out of work due to being laid off, furloughed, or quarantined. It also includes people who are unable to work due to lack of childcare or business owners who can’t operate right now. Furthermore, those who withdraw funds from a traditional IRA or 401(k) will still be liable for taxes on the sum they remove, but those taxes won't be due immediately -- they can be spread out over a three-year period. All told, these changes make early retirement plan withdrawals much easier to take, and much more appealing. But it's still better to avoid them right now if possible. Even in times of crisis, there may be a better option. When you're already at the breaking point, taking some of your own long-term savings may seem easier than getting a loan or exploring other financing options. But before you withdraw a lump sum from your IRA or 401(k), remember a couple of things: 1. Right now's not the best time to take a retirement plan distribution. The stock market has taken a beating in recent weeks, and liquidating investments is a good way to lock in your losses -- losses you might otherwise recover from if you were to leave your retirement savings alone for a while. 2. The more money you withdraw ahead of retirement, the less you'll have during retirement, when you may need it even more. And to be clear, it's not just your principal withdrawal you'll be missing as a senior; you'll also lose out on growth on that sum. In other words, if you withdraw $20,000 today, and you're not planning to retire for another 30 years, you'll end up having lost out on roughly $152,000 if your investments in your retirement plan normally generate an average annual 7% return, which is a reasonable assumption for a portfolio that's heavily invested in stocks. If you're without an income due to COVID-19 and are worried about paying bills in light of it, explore your options for relief before tapping your retirement plan early. Your mortgage lender, for example, may allow you to defer your payments temporarily while you're out of work, while your utility provider may give you extra time to pay your electric bill. These are just a couple of examples, but the point is that it pays to see what leeway you might get in terms of paying bills before rushing to raid your retirement plan. Though having that option is a good thing in theory, taking an early IRA or 401(k) withdrawal is a move that could end up hurting you big time down the line. Questions about this? Contact Kim Kelly today. NEW FORM—1099-NEC for 2020
The IRS has revived an old form last used back in 1982! The IRS has separated out the reporting of payments to non-employees from Form 1099-MISC —where it was reported in Box 7—and they have also redesigned Form 1099-MISC for tax year 2020. Because non-employee payment reporting has been removed from Form 1099-MISC for 2020 and the foreseeable future, the IRS has redesigned Form 1099-MISC. The biggest change is Box 7, which was previously used for reporting non-employee payments and is now used for direct sales of $5,000 or more. The new 1099-NEC form for 2020 is not complicated, but figuring out who must receive it may be difficult. Filing form 1099-MISC/NEC is still the law! For 2019 businesses are required to send a 1099-MISC to report payments to unincorporated vendors for services that total over $600. If you need these forms prepared, we can help! Having the vendor fill out a W-9 form is the easiest way to gather information come tax time. View and download this new form for free! PPP Paycheck Protection Program
The PPP authorized up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The loan amounts will be forgiven as long as:
Related Data - Unemployment Stats: In February, the unemployment rate was at a historic low of 3.5%. The U.S. economy lost a staggering 20.5 million jobs in April, pushing the unemployment rate to 14.7% according to data released by the U.S. Bureau of Labor Statistics. Among the hardest hit sectors were the leisure and hospitality industries -- which shed some 7.7 million jobs -- though employment fell sharply across all major industries. Other notable job losses occurred in food and drinking service sectors (which lost 5.5 million jobs), education and health services (which lost 2.5 million jobs) and retail employment (which lost 2.1 million jobs). RMD –REQUIRED MINIMUM DISTRIBUTIONS. The coronavirus stimulus bill suspended the RMD requirement for this year. But what if you already took your RMD for 2020, and now you wish you hadn’t?
RMD distributions are the government’s way of getting their hands on some of the money that has grown tax-deferred for sometimes decades in your 401K or IRA. The new RMD age when you need to start withdrawing the money was pushed out to age 72 from 70 1/2 last year for folks who had not yet begun their distributions. Unrelated to the CARES Act, there is a permanent rule on the IRS books that allows a withdrawal from a retirement account to be “rolled over” within 60 days without any tax consequence. In the case of an RMD, you could do the rollover back into the account you withdrew it from, or move the money into another retirement account. Are you already past the 60 day window? You can return the money if you have been directly impacted by COVID-19. The expectation is that the IRS will soon release guidelines that may make it possible for anyone to return an RMD taken out in January or February, regardless of whether they’ve been affected by the Coronavirus or not. Remember you will need to repay the entire distribution. If you already took a 2020 RMD distribution, you likely had taxes withheld. If you intend to return the money to a retirement account, you need to repay the entire amount, not just what landed in your pocket. For example, if you took $10,000 and had $1,000 in taxes withheld the net you received was $9,000. You will need to repay the entire $10,000 into a retirement account |
AuthorKim Kellly, EA is a professional serving business owners and personal tax filers around the world since 1993. She is based in San Diego California. Archives
January 2021
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