April 17, 2020: A Review of Current Legislation
We trust that you and your families are coping well during this period of stay at home orders. For Richard’s family, Heather and all five boys are home and we are enjoying game nights including Dominoes, Uno, Skip-Bo, Scategories, Left-Right-Middle, Ping-Pong and Beer-Pong (minus the beer but a beer, wine or whiskey on the side is within the rules). All the boys are taking their classes online and doing well. Our three oldest are home from college and our two youngest are all taking their classes online. If you are keeping score, Gray attends Angelo State, Charles: University of Tennessee, Logan: Texas Tech, Colman: Texas State this fall and Barrett: Texas Tech this fall – yes, twins.
For Ann, she remains working at home in her high rise, taking care of our 88-year-old Mother who lives in the building. She has almost cleaned out and organized every cabinet, pantry and nook and cranny. She is enjoying video chats with her 9 nieces and nephews and Zoom get- togethers with friends. Of course, Richard’s updates on his family is hers as well!
It is timely to focus on IRS tax filing extensions and two major pieces of legislation that include items impacting a number of retirement and estate planning issues. This is a broad look at the subjects mentioned and there are numerous rules, exceptions and clarifications involved. We do not offer tax or legal advice but always welcome the opportunity to work with your CPA /Accountant or Estate Planning or Tax Attorney. In this comment we address:
- IRS Updated Rules for 2020 Tax Filings
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 20, 2020
- The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December 2019.
IRS Updated Rules for 2020 Tax Filings
The IRS announced that tax filing has been delayed until July 15, 2020, to file and pay federal income taxes originally due on April 15. No late-filing penalty, late-payment penalty or interest will be due. Individuals, trusts, estates, corporations and other non-corporate tax filers qualify for the extra time.
Extension of time to file beyond July 15
Individual taxpayers who need additional time to file beyond the July 15 deadline can request an extension to Oct. 15, 2020. An extension to file is not an extension to pay any taxes owed. Taxpayers requesting additional time to file should estimate their tax liability and pay any taxes owed by the July 15, 2020, deadline to avoid additional interest and penalties.
Estimated Tax Payments
Besides the April 15 estimated tax payment previously extended, the notice also extends relief to estimated tax payments due June 15, 2020. This means that any individual or corporation that has a quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment, without penalty.
Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020:
Provides payments that are credits* against your 2020 personal income tax
- The US Treasury is now printing and mailing checks or providing direct deposit as applicable
- The payments are not considered taxable income
- Each married couple filing jointly will receive $2,400.00.
- Payment amounts are reduced for married couples filing jointly whose adjusted gross income is between $150,001.00 and $198,000.00.
- Individuals will receive $ 1,200.00.
• Payments are reduced for individuals whose adjusted gross income is between
$75,001.00 and $99,000.00.
- Social Security recipients will automatically receive payments even if you are not required to file a tax return
- Those who receive Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI) or Veterans Affairs (VA) benefits will automatically receive payments however if you have dependents under the age of 17 you can use a new IRS tool online to register to claim the additional $500.00 per dependent they are eligible to receive.
- For any qualifying child under age 17 as of December 31, 2020, they will receive $500.00.
- No action is required if your qualifying child is listed on your tax returns
- Payments are based on your income tax return for 2019, or 2018 if you have not yet filed for 2019.
Technically, a tax “credit” is an offset to a tax-liability so there is some confusion as to the net effect of these payments with respect to your final tax-liability for 2020.
Question: Since it is termed a tax “credit” will I have to pay some or all it back to satisfy future tax obligations?
Bottom-Line: Is this payment free and clear and ready to spend?
As we understand it: Yes
As always, please consult a qualified tax-advisor.
The use of a tax-credit was simply the most expeditious method of making the payments as soon as possible. To clean this up, there is provision written into the law that says recipients of the economic impact payment will be credited as if they had paid the government back.
- Increases tax-deductible charitable contributions limits from 50% to 100% of adjusted gross income.
- As of January 1, 2020, it allows Health Savings Accounts, HSA’s, and similar accounts to pay for and/or reimburse you for over-the-counter medicines and certain health care products without a prescription or note from a physician.
- Allows employers to defer payment of the employers' share of social security tax for up to two years. This has applications to 1099 income as well. Note: Participation in the Paycheck Protection Program will impact this.
- Other Areas:
- Student Loans
- Loans from employer-sponsored retirement plans
- IRA Required Minimum Distributions
The Setting Every Community Up for Retirement Enhancement (SECURE) Act
- Changes to Traditional IRA Required Minimum Distributions (RMDs) for those approaching or at 70 ½ years of age.
- Allows the use of tax-advantaged 529 college accounts for qualified student loan repayments, up to $10,000.00 annually.
- 529 use has been limited to direct education costs, not loan repayments
- Relaxes rules for part-time employees to participate in company retirement plans.
- There are updated rules regarding Inherited IRA’s and Defined Benefit Plans (Pensions)
- Provides employers the use of annuities in 401(k) plans by removing legal liabilities related to annuity providers.
- While still researching the issue, we know that more than 70 organizations registered to lobby for the bill and millions in campaign contributions were spent to remove legal liabilities. These long-standing legal safeguards have been in place for a reason.
- We see numerous red flags with this provision and after further examination we will be glad to work with business owners and management to evaluate these new provisions.
- There will certainly be advantages, but well-rounded research is extremely important.
- We feel that many annuities are ‘Sold Rather than Bought” and few owners are properly educated in all aspects of these products.
We do have Annuity and Life-Insurance services available and are more than glad to assist you and your family.
Note: Take extra caution regarding annuities that are widely advertised on radio shows focused on “enjoy market gains without the fear of loss”. The old saying: “If it’s too good to be true …” applies here. These products may be “suitable” for an investor but may not always reach the higher standard of being “In Your Best Interest”. I have yet to hear any description of the actual product nor even identifying the strategy as an annuity-insurance product. Also take notice that only the pros and none of the cons are discussed. While they certainly have some appeal and may merit use in your total financial plan, know the limitations.
Required Minimum Distributions (RMDs):
For our clients above or approaching the age of 70 ½.
Both the SECURE Act 2019 and the CARES Act 2020 impact RMDs.
A Required Minimum Distribution (RMD) is the distribution that must be withdrawn from an IRA, 401k or other qualified retirement account at a certain age and is taxed as ordinary income.
SECURE ACT 2019: Required Minimum Distributions
- The RMD age has been 70½ years old. As of 2020, the age for mandatory withdrawals from retirement accounts has changed. It now must happen by April 1st following the year account holders reach age 72.
- Affinity Capital is glad to assist you with an RMD Lifetime Distribution Projection Report.
- Removes the prohibition on contributions to Traditional IRAs by individuals who have reached the age of 70 with earned income, which begins with tax-year 2020.
- Earned income is income derived from active participation in a trade or business, including wages, salary, tips, commissions and bonuses
- We are exploring the intersection of when a client can both contribute to an IRA while also being subject to RMD.
CARES ACT 2020: Required Minimum Distributions
- All RMDs have been suspended for 2020.
- If you qualify, individuals that have already taken their RMD for 2020 may request a 60-day rollover to re-contribute the amount back into their retirement accounts. There may be case by case situations if you are beyond the 60-day window.
An RMD calculation is based upon the previous year-end balance, December 31st, of all combined retirement accounts. Because markets have seen a decline in 2020, the RMD amount would have been a much larger percentage of a retiree’s account. This new provision will allow you to keep that money in your accounts, potentially recovering market losses as the economy normalizes.
- A fundamental aspect of investment management as well as estate planning – at any age – is to combine all retirement accounts to one whenever possible. This can be done by:
- Rolling over old 401k’s to a new or existing Individual Retirement Account
- Combining multiple IRA’s
This will reduce paperwork, multiple statements and website logins. It will also enhance the consistency in managing your portfolios by avoiding competing investment allocations. It will also simplify estate administration for spouses, loved ones and/or executors & trustees.
Affinity Capital is glad to assist you in working with an Estate Planning Attorney.
As always, please call us with any questions. Stay Safe and Healthy!