Coronavirus Act Allows You to Pull Money Out of Retirement Accounts Without a 10% Penalty; Allows Top Line Charitable Deductions

The Internal Review Service and the Coronavirus Aid, Relief, and Economic Security Act provide the following tax relief.

Tax Filing and Payment Delayed to July 15

The IRS delayed both the tax filing and payment deadlines from April 15, 2020 to July 15, 2020.  

Penalty-free Withdrawals from Retirement Accounts

The CARES Act waives the 10 percent penalty tax applied to early distributions from IRAs and defined contribution plans (such as 401(k) plans) in the case of coronavirus-related distributions made between January 1, 2020, and December 31, 2020.  If you re-contribute the distribution within three years, it will be treated as a tax-free rollover contribution and will not count against your contribution limits.  If the distributions are not re-contributed, the income tax on the distribution can be paid over three years.

Eligibility

You are eligible if you or a family member is infected with the coronavirus or is economically harmed by the public health crisis.  You do not need to provide proof other than self-certification that you meet these conditions.

Distributions from the following plans are eligible penalty-free withdrawals:

• A qualified employee plan under section 401(a), such as a section 401(k) plan
• A qualified employee annuity plan under section 403(a)
• A tax-sheltered annuity plan under section 403(b) for employees of public schools or tax-exempt organizations, or
• An individual retirement account under section 408(a) or an individual retirement annuity under section 408(b) (IRAs).

Limits on Distributions

Distributions that can be treated as coronavirus-related are limited to $100,000 per individual.

Impact on Income Tax for 2020

In addition to waiving the 10 percent penalty, the CARES Act allows you to choose to include the coronavirus-related distribution in your gross income over a period of three years, instead of including the full distribution in your 2020 taxable income.

Loans from Retirement Plans

Under the CARES Act, defined contribution plans are permitted to allow plan loans up to $100,000 (increased from $50,000 currently allowed) for 180 days after the enactment of the law.  Repayment of new and existing plan loans that would occur between now and December 31, 2020, will be extended for one year for employees who are affected by the coronavirus.

Temporary Waiver of Required Distribution Rules for Retirement Plans and Accounts

The CARES Act waives required minimum distributions that are required to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs. The waiver includes required minimum distributions that are due by April 1, 2020, because the account owner turned 70 ½ in 2019. 

Expansion of Charitable Tax Deduction

The CARES Act expands the charitable tax deduction for individuals by allowing taxpayers who do not itemize to take up to $300 in an above-the-line tax deduction.  For taxpayers that itemize, the CARES Act allows them to increase the limitation on charitable deductions from 60 percent to 100 percent of modified income for cash contributions generally to public charities in 2020.  It also increases the limitation for food contributions by corporations from 15 percent to 25 percent of modified income.

Student Loan Payments by Employers

If your employer provides a student loan repayment benefit, you can temporarily exclude up to $5,250 in these payments from your income.  The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, or books) provided by the employer under current law.  The provision applies to any student loan payments made by an employer on behalf of an employee after March 27, 2020, and before January 1, 2021.

-RW

(via Senator Brian Schatz)