CARES Act Updates: Changes in Required Minimum Distributions (RMD), Taxes Owed on Unemployment Benefits, and EIDL Tax-Free Grant/Loans Still Available
CARES Act Updates
Changes in Required Minimum Distributions (RMD),
Taxes Owed on Unemployment Benefits,
and EIDL Tax-Free Grant/Loans Still Available
#14 of a Series, July 2, 2020
A. Required Minimum Distributions (RMD)
1. The CARES Act allows taxpayers to skip 2020 Required Minimum Distributions (RMD) from IRAs and certain other retirement accounts like 401(k)s. On June 23, IRS announced that anyone who has already taken an RMD this year now have the opportunity to roll those funds back into their retirement account thus avoiding paying taxes on these distributions. The time period for taking advantage of this rollover option has been extended to August 31, 2020. Note: This does not apply to Defined Benefit Plans.
2. This can be a golden opportunity for some taxpayers who not utilizing the RMD funds for retirement. Every situation is different and the advantages and disadvantages need to be carefully evaluated before making this weighty decision. The major advantage is continued tax-deferred income growth. However, one must consider the possibility that one could return the funds only to experience a drop in the market and lose the gains they have already "harvested" when the market was higher.
3. If you took a $10,000 RMD distribution and had $2,000 withheld for taxes, you received a check for $8,000. To restore your distribution 100% you would need to remit $10,000. The $2,000 in taxes will be credited as tax withheld on your 2020 form 1040 tax return and everything else being equal, it would be refunded to you at that time.
4. Tax idea to think about! Taxpayers can still make Qualified Charitable Distributions (QCD) in 2020. Many of our clients in past years have, in lieu of taking an RMD paid to themselves, committed RMD funds to go directly to a charity, church, synagogue, or other 501(c) organization. This strategy is called a Qualified Charitable Distribution (QCD). A major benefit of doing this is that a QCD reduces both your federal and state taxes regardless if you itemize or take the standard deduction.
5. Although an RMD is not required this year, taxpayers can still gift whatever amount they desire, up to $100,000, from their IRA directly to a 501(c) organization. In sum, a taxpayer can reap significant benefits this year by skipping an RMD and also making a direct transfer from their IRA to a charity in the amount they desire.
Contact our office for a free copy of a recent article we wrote about additional tax savings and benefits of QCDs.
B. Unemployment Benefits
1. With current unemployment at over 47 million, many Americans have been receiving state unemployment benefits. In addition to what the states pay, the CARES Act provided an additional $600 per week. This is a much-needed benefit but the bad news is that many people think these benefits are tax free. Regrettably, unemployment benefits are fully taxed by IRS and most states including Ohio. Some states, including Ohio, allow for the recipient to have federal taxes withheld but zero for the state. However, the federal withholding is generally only about 10% which is far too little for most people at tax time. Also, there is zero withholding on the $600/week CARES portion.
2. After July 15, our CPA firm is offering a "value added free tax projection" for any of our clients who are receiving Unemployment Benefits. This will enable us to help you plan for this unpleasant surprise. Our knowledgeable and experienced staff will also review the 2020 tax projection and advise you of tax planning and financial ideas that can reduce your tax burden.
C. Tax-free EIDL Loan/Grants Still Available
1. EIDL tax-free loan/grants of $1,000 per employee up to $10,000 are still available. Many of our clients have not yet applied for this “free money” and are losing out on this auspicious opportunity.
2. No matter how small your business or organization is, even if not profitable, if you file a tax return you are eligible to apply. A self-employed individual is considered an “employee” for purposes of obtaining at least the $1,000 and possibly up to $10,000 tax-free just for applying. Refer to our June 18, 2020 newsletter for detailed information and guidance.
3. We urge you to go directly on the SBA website and complete the easy application which should take no more than 30 minutes to do. https://www.sba.gov/page/disaster-loan-applications As of yesterday, the SBA was still accepting applications on a first-come, first-served basis. Do not hesitate because the money could be gone tomorrow.
4. Consider forwarding this information to family members and friends who own or manage a business or non-profit organization.
Please call our office or send an email if you have any questions or if we can be of help to you during what is probably one of the most difficult and challenging times in our lives.
Ron Lykins' Tax Team
Ron Lykins | 07/08/2020