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Taxes in the Time of Coronavirus

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As the coronavirus pandemic continues to shake up our lives, there have been a flood of provisions released from the government that may impact your taxes. While some of these changes are administrative, several may present valuable tax planning opportunities. Please know that our team is here to help you through the following changes and planning opportunities as appropriate.

  1. Tax Filing and Payment Extension: The IRS extended the deadline for 2019 individual tax return filings and associated payments from April 15, 2020 to July 15, 2020. All states with income tax have pushed their deadline back as well. Ohio, Kentucky, and Indiana are matching the federal due date; as of this writing, some states have deadlines earlier than July 15, but as changes are being made frequently, it’s best to consult your tax professional regarding your specific deadlines.

  2. Estimated Federal Tax Payments: First quarter 2020 estimated tax payments are now due July 15, 2020. Second quarter payments are still due June 15, 2020, but there is speculation that second quarter payments will be pushed back to match the July date. {Update: On April 9, the federal government moved the second quarter estimated tax payment deadline to July 15, 2020.} If you have suspended IRA required minimum distributions and may need to pay taxes by another means, see below for details.

  3. Suspended Required Minimum Distributions (RMDs): With the passage of the CARES Act on March 27, the government has suspended the requirement to take RMDs from qualified retirement accounts. This includes IRAs, Inherited IRAs, and 401(k)s, among others. This could create an opportunity for large tax savings, provided you have appropriate liquidity in other accounts to support your living expenses for the year. Let’s consider an example:

    A single taxpayer expected to have a $177,200 adjusted gross income in 2020 (including social security benefits, interest, dividends and a $100,000 RMD) now has the option to skip their RMD in 2020. Doing so would reduce their federal tax bill by more than $27,000!

    Be aware that the RMD suspension may impact your estimated tax plans. Contact your tax professional if you normally have your tax payments withheld from RMDs as you may need to make quarterly tax payments this year to avoid paying a penalty when filing your 2020 return.

  4. Early Retirement Plan Distribution: For those under 59½ that have been affected by COVID-19, there is an option to withdraw up to $100,000 from a retirement plan—including IRAs and 401(k)s—without the usual 10% penalty. The associated tax bill may all be paid in 2020 or spread evenly over three years. Since the requirements for eligibility and repayment will vary on a case-by-case basis, a conversation with your tax professional is recommended to determine the full impact of this. In general, we suggest that clients don’t withdraw from tax-deferred accounts, but this allows for flexibility to those with unique circumstances.v

  5. IRA and HSA funding: The deadline to make IRA and HSA contributions for 2019 moved with the tax filing deadline. There are now three additional months available to maximize funding to these accounts for tax year 2019, while still being able to fully contribute for 2020.

  6. Roth Conversions: If you are able to skip your 2020 RMDs and your annual income drops as a result, there may be an opportunity to convert funds from a traditional IRA to a Roth IRA while you are in a lower tax bracket than normal. The amount of tax savings will depend on your marginal tax rate for the year and should be properly planned before initiating. Over the long term, converting funds from a traditional IRA or 401(k) would result in lower annual future RMDs. If you have legacy plans, moving funds to non-RMD accounts—such as a Roth IRA—could increase the amount available for transfer to your heirs.

  7. Pay taxes due now: Although the deadline to pay any outstanding 2019 taxes has been extended until the middle of July, we generally recommend moving forward with paying any federal, state, and city obligations now. With the current low interest rate environment, there is minimal financial benefit to holding the money in an account until the summer. Paying now will also remove one more task from your to do list.

  8. Delayed K-1s: As a result of the CARES Act, tax changes, and small business loans, many private investments are now adapting their year-end documents. Initially we had anticipated receiving K-1 documents for the 2019 tax year by early April. With the multitude of adjustments that may need to be made, the receipt of these isn’t expected until after April 15.

As our country—and the world—continues to battle the health, financial, and social implications of COVID-19, we expect to continue to see changes on an almost daily basis. The Foster & Motley team is here to help guide you through this tumultuous time and will continue to provide timely updates on developments. Please don’t hesitate to reach out to any member of our team, and we wish you and your families health and wellness during this unprecedented time.