The current coronavirus pandemic has led to abrupt and dramatic changes in the financial world as the government works to create order and stability in this difficult time. We are reaching out now to update you on a few particularly time-sensitive issues in the rapidly-changing tax and financial landscape based on current information.
Extension of Tax Deadlines.
The IRS has extended the deadline for filing 2019 federal income tax returns and paying the tax to July 15, 2020. This extension also applies to IRA contributions and Health Savings Account contributions for 2019 which can now be made until July 15, 2020. You do not need to do anything to take advantage of this automatic extension, but if you need a further extension to October 15 for filing you will need to request that extension by July 15. The IRS has also extended the deadline for 2020 quarterly estimated tax payments that would have been due on April 15 to July 15 but has not yet published guidance regarding any extension of the due date for June 15 quarterly estimated payments.
Most states have also extended the deadline for filing and paying state income taxes to July 15 in accordance with the federal deadline, but these rules vary from state to state and continue to change on an almost daily basis. Among states of interest to our clients that have extended the deadline for filing returns and paying state taxes are California, Connecticut, District of Columbia, Georgia, Maryland, Massachusetts, Pennsylvania, South Carolina and New York. New Jersey announced today an agreement to grant the extension to July 15 and a commitment to enact the necessary legislation. Virginia is a notable exception – so far, Virginia has extended the deadline for payment to June 1, but has not extended the deadline for filing returns, which is May 1. This may change, but for now Virginia returns are due May 1, payments are due without penalty on June 1 but will accrue interest from May 1; and the Department of Revenue is encouraging taxpayers who can pay by May 1 to do so to avoid interest.
Required Minimum Distributions from Retirement Plans Waived for 2020.
The CARES Act (Coronavirus Aid, Relief and Economic Security Act of 2020), enacted on March 27, 2020, eliminates the requirement to take required minimum distributions (RMDs) from retirement plans during 2020. If you do not need to withdraw retirement funds for your support, this waiver allows you to (i) avoid liquidating assets at distressed values in order to make a withdrawal; (ii) avoid receiving the taxable income of an RMD (which was most likely calculated when the account was worth more than its current value); and (iii) leave the assets to continue to accumulate tax-free in the retirement account when market conditions begin to recover. This RMD waiver applies to IRAs (including SEP IRAs and SIMPLE IRAs) and to company plans such as 401(k), 403(b) or 457(b) plans and should apply to beneficiaries taking RMDs from inherited IRAs as well as original IRA owners. For a person who turned 70 ½ in 2019 but waited to take their first RMD in 2020, both the 2019 and 2020 RMD requirements are waived.
If you have not yet taken an RMD for this year, you may benefit by not doing so. If you have annual RMDs scheduled automatically, you may want to stop that process for this year. If you have already taken an RMD this year, it may be possible to undo the distribution depending on the circumstances. If it has been less than 60 days, you may be able to roll it back into your IRA (assuming that you have not done another rollover within the last year). If more than 60 days have passed, it may be possible to have the distribution treated as a Coronavirus-Related Distribution under another provision of the CARES Act. In any case, it will be important to act promptly to get informed advice before taking action. Please reach out if you would like to discuss how to handle RMDs from your IRAs here at HCA.
Economic Impact Payments – Direct Checks to Taxpayers.
The Treasury Department and the IRS are planning to begin sending checks directly to taxpayers in the near future (they say three weeks, although commentators are more skeptical). For your information, here is a quick summary of the basic contours of the plan; although it may not benefit you, it may be relevant to other family members. Payments will be up to $1,200 for an individual adult or $2,400 for a married couple filing jointly, with an additional $500 for each child under age 17. These amounts phase out based on income. Income limits for a full payment are $150,000 (married filing jointly), $112,500 (head of household); $75,000 (single,) and they are reduced by $5 for every $100 in additional income. Eligibility is based on 2020 income (which is not yet known), but the determination of how much to send an individual will be based on their 2019 tax return if it has been filed, otherwise on their 2018 tax return. Using past tax returns to determine who is eligible for payments that are in fact tied to 2020 income is not an exact science so there will be a need for future adjustments for many people. For instance, someone who will be entitled to payments because of low 2020 income but who had 2019 income too high to qualify may not receive a check this year and will have to claim a refund on their 2020 return next year. Someone who had a low income in 2019 and a high income in 2020 on the other hand may get a large check that would not have been merited based on 2020 income – for now at least, there appears to be no repayment obligation in such a situation.
Checks will be calculated and sent out automatically to eligible recipients who filed tax returns in either 2019 or 2018 without the need to take affirmative action. It appears that payments will be made into an account where Social Security checks are deposited for Social Security recipients, otherwise to the bank account where the most recent federal tax refund was deposited, if any, otherwise mailed to the last known address on file with the IRS. Anyone who does not ordinarily file an income tax return and would qualify for a payment based on income level should consider filing a simple tax return for 2019 as quickly as possible, including bank account information, so that your information is available for calculation and delivery of your economic impact payment. The IRS says that it “will soon provide” information on how to file such a simple return at IRS.gov/coronavirus. In addition, anyone who had their most recent federal tax refund deposited to a bank account that is no longer in use or has other reason to think that the IRS does not have current information on how to reach them should take steps to get current accurate information on file with the IRS. Finally, if you have filed a return for 2018 and your 2019 income is lower and within the range eligible for a payment, you may want to consider filing your 2019 return quickly. One last caveat – the Treasury Department and IRS are working hard to get checks out quickly to as many people as possible and not all the mechanics or details for making this happen are completely clear yet.
We hope that this information is useful and informative. The CARES Act was just passed last week and some of the state income tax information has changed as recently as today, so please be aware that this is a very fluid situation and likely to remain so. Please reach out to us at HCA and/or to your accountant with questions or concerns; we would be happy to talk to you about the current situation as well as ongoing developments.
Harbour Capital Advisors, LLC
7601 Lewinsville Road, Suite 206
McLean, VA 22102
Harbour Capital Advisors, LLC (“HCA”) is neither an attorney nor an accountant, and no portion of the content provided herein should be interpreted as legal, accounting, or tax advice. The tax information contained herein is general in nature and is provided for informational purposes only. HCA does not provide legal, tax, or accounting advice. HCA cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on preand/or after-tax investment results.