As you prepare for year-end and consider your 2020 tax planning, be aware of several pandemic-related changes to the tax code. Impacted areas include but are not limited to charitable donations and retirement plan distributions. You may need to consult a tax professional to ensure the law is most appropriately and beneficially applied to your specific situation.
New Charitable Donation Benefits
Among the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act is a new universal deduction for charitable contributions. Taxpayers who don’t itemize may now deduct up to $300 per year in charitable contributions. Congress has granted this universal nonitemized “above the line” charitable deduction so that all taxpayers can deduct at least some of their donations. The CARES Act also raised the percentage limit on charitable contributions from 60% of modified adjusted gross income (MAGI) to 100% when itemizing. Taxpayers should itemize only if all their personal deductions, including charitable contributions, exceed the standard deduction. The Tax Cuts and Jobs Act (TCJA), which went into effect in 2018, roughly doubled the standard deduction.
Retirement Distribution Options
Additionally, required minimum distributions (RMDs) that usually must be taken from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have been waived for 2020. This includes RMDs that would have been required by April 1st for taxpayers that reached age 70½ during 2019, and for 5% and above equity owners over age 70½ who retired during 2019 after having deferred taking RMDs until April 1st following their year of retirement. So, if there is not a financial need to take a distribution in 2020, taxpayers won't have to.
For taxpayers directly impacted by COVID-19, the CARES Act further waives the 10% penalty for distributions up to $100,000 from IRA’s and defined contribution qualified retirement plans made on or after 1/1/20 and before 12/31/20. Income attributable to these distributions will be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within the three years after receipt without regard to that year’s cap on contributions. Those considered impacted must be diagnosed or must have a spouse diagnosed with COVID-19, or those who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced hours, or are unable to work due to lack of childcare.
Applying Distribution Taxes toward Estimated Taxes
Individuals who are facing a penalty for underpayment of estimated taxes and do not have the option of increasing withholdings may take an eligible rollover distribution from a qualified retirement plan before the end of 2020. Income tax will be withheld from the distribution and will be applied toward taxes owed for 2020. The taxpayer can more-timely roll over the gross amount of the distribution, such as the net amount received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be included as income for 2020, but the withheld tax will be applied over the full 2020 tax year to reduce the previous underpayments.