By Erin Jones, Wealth Advisor
Benjamin Franklin once said, “Nothing can be said to be certain, except death and taxes.”
And, he was right – but I think we’d all appreciate more time before both. If you’re reading this, good news, you’re alive. Try to make the best out of this life, even through these uncertain times. But for the tax situation – well, we do have more time now.
The Internal Revenue Service announced some changes that will impact tax-filers in response to the COVID-19 pandemic.
These changes include filing and payment extensions, a later deadline to make a contribution to your Individual Retirement Accounts, and temporary elimination of the Required Minimum Distribution requirement.
Check below to see if you are impacted by these CARES Act tax changes and how you may be able to take advantage of the opportunities available.
Filing and Payment Extension Deadlines
The IRS has extended the 2019 tax filing deadline to July 15 (normally April 15) in a historic response to the current pandemic.
This extension will likely benefit those who have to pay the most, but it does provide everyone the opportunity to delay filing.
However, if you normally receive a tax refund, the IRS is urging taxpayers to file as soon as possible. According to the IRS most tax refunds are still being issued in about 21 days.
For taxpayers that pay quarterly estimates, the first quarter payment that’s typically due April 15 has been extended to July 15. Please note, as of right now, the second quarter payment is still due on June 15 – making your second quarter payment due before the first quarter.
The new tax deadline also aligns with the extension to make a 2019 contribution to your Individual Retirement Accounts and Health Savings Accounts.
With the current economic environment and “stay at home” safety measures, income and cash flows may be affected. The extension will ideally allow you enough time to recover your budget and savings and stay on track for retirement.
The 2019 and 2020 contribution limits to a Traditional or Roth IRA are $6,000 per year and an additional catch-up of $1,000 if you are age 50 or older.
The HSA contribution limit for both tax years is $3,550 and $7,100 for a family. In addition, to these limits, participants who are age 55 or older can contribute an additional $1,000 as a catch-up.
For contribution limits and information for employer-sponsored plans or self-directed plans for business owners, contact your Cultivate Wealth advisor.
Retirement Relief for 2020
In the words of Warren Buffett, “Be fearful when others are greedy. Be greedy when others are fearful.”
This oversimplification is to say that the objective of investing is to buy low and sell high.
In the case of Required Minimum Distributions (RMDs) from retirement plans for those age 70½ or older as of December 31, 2019, the last thing many retirees want to do is take an RMD when they may not need that additional cash flow.
For the 2020 tax year only, the IRS – through the CARES Act – is allowing the required withdrawal to simply be skipped. This also applies to RMDs on inherited retirement accounts as well for the 2020 year.
As financial advisors, we encourage clients to stay the course of their financial plan and continue to earmark their retirement accounts for retirement. However, during this unprecedented emergency, there is additional tax relief in the event that cash flows are reduced and begin to heavily impact you and your family.
The CARES Act will allow for penalty-free distributions, up to $100,000, from your retirement account.
Normally, a distribution prior to age 59½ carries a 10% tax penalty, which will be waived for the 2020 tax year. However, income taxes will still be owed on the distribution, but that tax will automatically be spread out over the next three years to reduce the economic impact.
Quarterly and monthly statements will be arriving soon to your inbox.
First quarter 2020 market performance for the Dow has been the worst in history – which provides an opportunity for your financial plan.
If your goal is to maximize your legacy and reduce the tax burden of your heirs, it may be a good time to convert your Traditional IRA to a Roth IRA. What does this mean?
If at the beginning of the year, your Traditional IRA was worth $250,000 and you were considering converting it to a Roth IRA, you would owe income taxes on $250,000.
Hypothetically, if that same portfolio is now worth $200,000 and your goals of a Roth conversion have not changed, you can still convert the whole amount, but you would now owe taxes on $200,000.
The new Roth IRA can be reinvested the way it was before, aligning with your risk tolerance and goals, and ultimately, have the opportunity to recover those losses from first quarter 2020 while owing less in taxes due to the conversion. Upon your passing, your heirs will inherit the Roth as an income tax-free benefit.
If you are ready to take advantage of some of the CARES Act tax changes or need more information on how they may impact your portfolio, reach out to an advisor today.