Since mid-March, we have been in unprecedented times due to the COVID-19 Pandemic. The country has been shut down for more than two months and only now are states slowly beginning to open back up. With much uncertainty about the future, there are some individual tax planning opportunities that can be done under recent legislation.
President Trump signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) on March 27th in response to the COVID-19 crisis. The CARES Act had some significant changes to retirement distributions. If you are 70 ½ or older, you do not have to take your required minimum distribution (“RMD”) for 2020 from your retirement account. If you do not need the money, consider calling your advisor and telling him or her that you want to waive this for tax year 2020. This move will decrease your taxable income for 2020 and your tax liability. However, you will have a RMD unless Congress extends this change through tax year 2021.
If you have already received your 2020 RMD, there is still relief available. If you received your RMD between the dates of February 1, 2020 and May 15, 2020 you have until July 15, 2020 to roll over that distribution to avoid paying tax on that amount. Call your advisor and tell him or her that you want to return the distribution so that you are not taxed on it.
Finally, if you are under 59 ½ years old and take an early distribution from your retirement account, you are normally subject to regular tax on this distribution along with a 10% penalty.With the CARES Act, you can now access this money early without the 10% penalty if you have been impacted by COVID-19.
How do you know if you have been affected by COVID-19? Obviously, if you or a family member have been diagnosed with COVID-19, you are impacted. Or, if you have suffered financial hardship due to COVID-19, you will not be subject to the 10% penalty. Financial hardship means job loss, furlough, reduction in hours, inability to work due to lack of child care or loss of your business.
Net Operating Losses
For tax year 2018, if you had a net operating loss (“NOL”) on your individual income tax return, you had to take this loss and carry it forward. Under the CARES Act, any NOL that arose after December 31, 2017 and before January 1, 2021 can be carried back for five years. Additionally, there is no taxable income limitation on the amount that you can carry back. For example, if you had an NOL for tax year 2018 in the amount of $100,000 and taxable income of $120,000 in tax year 2013, you can carry back the full loss of $100,000 to tax year 2013. This is great provision under the CARES Act.
Excess Business Losses
Finally, beginning in 2018, you were limited in the amount of business losses you could take on your personal return. The losses you could take were limited to $250,000 if you were single or $500,000 if married filing a joint return. These were limited due to the Tax Cuts and Jobs Act (“TCJA”) signed by President Trump in December of 2017. Under the newly enacted CARES Act, however, this limitation has gone away. If you have filed your 2018 and 2019 returns and had your loss limited, you can amend those tax returns and fully deduct the losses you incurred.
In summary, although COVID-19 has taken a devastating toll on the economy, there are many tax advantages that are available because of the CARES Act. Contact your Schneider Downs tax representative if you have further questions.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.