fbpx

Blog

COVID-19 Tax Considerations

John J. FureyJune 5, 2020

COVID-19 Related Information

The coronavirus has upended our lives and affected almost every aspect of our daily living. The tax rules have also been changed in ways that were unthinkable before the virus. In February, would you have believed someone who told you that the tax return deadline in 2020 would be changed from April 15?

Here is a summary of some of the COVID-19 tax-related issues that impact individual taxpayers.

Changed Deadlines

  • 2019 tax returns and any tax payments due to the IRS must be mailed by July 15, 2020.
  • IRA contributions for 2019 are due by July 15, 2020.
  • IRA contributions already made can be withdrawn before July 15, 2020 without penalty.
  • Taxpayers have until July 15, 2020 to request an extension to file their tax returns. Any tax due must be paid on July 15, 2020. The extension due date is still October 15, 2020.
  • Almost all states have changed their 2019 tax returns deadline to July 15, 2020.
  • The 1st and 2nd quarter IRS estimated tax payments for 2020 must be mailed by July 15, 2020.
  • The 1st and 2nd quarter PA payments are also due on July 15, 2020.
  • Almost all states have changed their 1st quarter payment deadline to July 15, 2020.
  • Some states have not changed their 2nd quarter payment deadlines. The 2nd quarter payment to NJ is due June 15, 2020.

Retirement Accounts

  • Taxpayers who are age 72 and older must generally take Required Minimum Distributions (RMDs) from their retirement accounts every year.
  • The Coronavirus Aid, Relief and Economic Security Act (CARES Act) suspended the requirement for taxpayers to take RMDs for 2020 only.
  • If you withheld a portion of your RMD to pay taxes in the past and you decide to eliminate or reduce your RMD in 2020, you may need to make quarterly estimated tax payments.
  • If you are under 59 ½ any distribution that you take from your retirement account is subject to a 10% penalty tax, in addition to regular income taxes.
  • The CARES Act eliminated the 10% penalty on any withdrawals up to $100,000 in 2020. You still need to pay regular income taxes on any withdrawals, but you can pay the taxes over 3 years. You can repay the withdrawal over 3 years and pay no taxes.
  • If your employer’s 401(k) plan is amended to permit the maximum loan amount under the CARES Act, you can borrow the lesser of $100,000 or 100% of your account balance from your 401(k) account.

Charitable Contributions

  • The CARES Act made two changes for charitable contribution deductions for 2020 only:
    • Even if you do not itemize your deductions you can take a $300 deduction for cash charitable contributions.
    • If you do itemize your deductions, you can deduct up 100% (instead of 60%) of your Adjusted Gross Income for cash contributions to a charitable organization.
    • Contributions to a donor-advised fund don’t qualify for these two charitable deductions.

Economic Impact Payments (Stimulus Payments)

  • Stimulus payments are not taxable and do not affect other benefits, such as food stamps or unemployment compensation.
  • There is no claw back on future tax returns for any overpayments of Stimulus Payments.
  • Here is a link to the IRS website that has information about Stimulus Payments.

Unemployment Compensation

  • Tens of millions of people have applied for unemployment compensation (UC).
  • The amount of UC benefits varies by state and the benefits are considered a replacement for wages.
  • State UC benefits generally replaces a portion of a person’s wages.
  • The CARES Act provides $600 per week in federal UC benefits on top of state benefits. This extra $600 is currently scheduled to be paid through July 31, 2020.
  • UC benefits are taxable on IRS returns. If you receive UC benefits, you may want to have taxes withheld to avoid having to make estimated quarterly tax payments.
  • UC benefits are not taxable on PA returns, but some states do tax UC benefits.

Other Items

  • Gifts from family and friends are not taxable.
  • Gifts from employers are typically not considered gifts but are considered compensation.
  • Employers can contribute up to $5,250 towards an employee’s student loan payments for 2020 only. Such a contribution is not taxable to the employee.
  • If you are an employee and working from home, you are not entitled to deduct home office expenses on your federal tax return. You may be able to deduct such expenses on your state return.
  • If you are working from home in a different state than your normal work location, you may owe state income taxes to your home state.
  • If you are laid off, you are entitled to take your Health Savings Account (HSA) with you. It is your account.
  • Even if you are unemployed you can continue to make contributions to your HSA.
  • If you planned to make certain quarterly tax payments based on your 2019 income and your 2020 income will decrease substantially, you may want to recalculate your quarterly estimated tax payments.
  • If your income has decreased substantially you may qualify for:
    • The Earned Income Credit, which is a refundable credit;
    • The Child Tax Credit for children under 17, which is a refundable credit.

If you have any questions about tax issues, please do not hesitate to call our office (610-651-2777).

 

Sources:

Wall Street Journal Online
Forbes Online
Additional website disclosures