Did You Know? IRS Enables Millions to Qualify for the $100,000 IRA Grab and Repay

Question

My home business did not get affected by the COVID-19 pandemic, but I’ve lost about $30,000 in revenue year-to-date because clients didn’t have money to pay me. Also, my significant other’s job hasn’t changed.

I wanted to take money from my IRA to help with cash flow and use the repayment benefit. I don’t seem to qualify under any of the factors, but I’ve absolutely taken a financial hit and need some cash. Any advice?

Answer

The IRS has issued new guidance expanding on who qualifies for corona virus related distributions from retirement accounts, and you now qualify under the new rules (and so do millions of others).

We’ll also explain how the repayment provision works, since you want to eventually re-contribute the funds.

What the CARES Act Says

A corona virus-related distribution from your qualified retirement plan, Section 403(b) plan, or IRA gets two tax benefits:

1.     If you withdraw and keep the money, you pay no 10 percent early withdrawal penalty and you can spread the income equally over tax years 2020, 2021, and 2022. You also can elect to include it all in tax year 2020, if you want.

2.     You can repay the money within three years of the distribution date and pay no tax or penalty on the amount.

Under the CARES Act relief, you qualify for a corona virus-related distribution if

·        You, your spouse, or your dependent is diagnosed with COVID-19 with a CDC-approved test;

·        You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;

·        You experience adverse financial consequences as a result of being unable to work due to lack of childcare due to COVID-19; or

·        You experience adverse financial consequences as a result of closing or reducing your business hours due to COVID-19.

There are also two additional CARES Act rules for corona virus-related distributions:

1.     You can’t treat more than $100,000 per person as a corona virus-related distribution, and

2.     You must take the distribution on or after January 1, 2020, and before December 31, 2020.

IRS Expands Relief

With the new IRS relief, you now also qualify for corona virus-related distributions if you experience adverse financial consequences because

·        You, your spouse, or a member of your household has a reduction in pay or self-employment income due to COVID-19;

·        You, your spouse, or a member of your household has a job offer rescinded or start date for a job delayed due to COVID-19;

·        Your spouse or a member of your household is quarantined, is furloughed or laid off, or has work hours reduced, due to COVID-19;

·        Your spouse or a member of your household is unable to work due to lack of childcare due to COVID-19; or

·        Your spouse or a member of your household owns or operates a business that closed or reduced hours due to COVID-19.

Household

For purposes of applying the additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Merriam-Webster defines a household as

·        Those who dwell under the same roof and compose a family, and

·        a social unit composed of those living together in the same dwelling.

It like this: roommates living together create a household, and if one of them is affected by COVID-19—say, lost his or her job and stopped contributing to the rent—the remaining roommates were adversely affected and should be entitled to the IRA grab and repay strategy.

Your Situation Explained

Let’s go over your situation and the options you have.

First, since you have a reduction in self-employment income, you qualify for a corona virus-related distribution.

And because you qualify, your spouse also qualifies for a corona virus-related distribution.

Both you and your spouse can take out up to $100,000 each as a corona-virus-related distribution.

Here’s an important point—how much you choose to take out doesn’t have to correspond to your actual need for funds or the extent of your adverse financial consequences.

We’re going to assume you take $30,000 out of your IRA on July 15, 2020, after you read this article.

Your Repayment Options

As we show you in the scenarios below, you have choices on how you treat your $30,000 distribution and eventually repay it.

Note. You’ll use new IRS Form 8915-E to report corona virus-related distribution tax items on your tax returns.

Scenario 1. You repay the $30,000 before you timely file your 2020 tax return:

·        You don’t include any of the $30,000 in income on your 2020 tax return. You pay no taxes or penalties.

Scenario 2. You elect to include all $30,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:

·        You amend your 2020 tax return to remove the $30,000 from income and claim a refund of tax paid on that amount.

Scenario 3. You include $10,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:

·        You claim $10,000 of income on your original 2020 tax return, and

·        You later amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.

Scenario 4. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $10,000 of the total $30,000 distribution, which you do on March 1, 2022:

·        You claim $10,000 of income on your 2020 tax return,

·        You claim no income on your 2021 tax return (because you made the $10,000 repayment prior to filing the return), and

·        You claim $10,000 of income on your 2022 tax return.

Scenario 5. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $20,000 of the total $30,000 distribution, which you do on November 1, 2021. This one is tricky because you have two ways to do it:

·        You claim no income from the distribution on either your 2021 or 2022 tax returns, or

·        You claim $10,000 of income on your 2022 tax return and amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.

Takeaways

Congress gave you a lot of flexibility to use retirement account funds to help you during the COVID-19 crisis.

The IRS greatly expanded who can take advantage of corona virus-related distributions by increasing who qualifies as experiencing adverse financial consequences.

If you qualify to take money out of your retirement, consider the following:

·        Both you and your spouse likely qualify to take distributions with the same event.

·        The amount you can take out does not have to equal your actual economic injury—you can choose how much you take out.

·        Electing to claim all the income in tax year 2020 might be tax-smart if you have a loss to offset it, or you are in a much lower tax bracket due to the economic downturn.

If you decide to repay the funds, do it strategically:

·        If you repay the entire amount, then doing so before timely filing your 2020 tax return is the best way to do it—which means before October 15, 2021, if you file with an extension.

·        If you don’t repay the entire amount and elect to spread the income over three years, you can time the repayment(s) to determine which tax years have the income, allowing you to minimize your tax bill.

One final note. The new easier relief applies to households, and that expands the possibilities for the $100,000 grab and repay for spouses and roommates.

Congress gave you a lot of flexibility to use retirement account funds to help you during the COVID-19 crisis.

The IRS greatly expanded who can take advantage of corona virus-related distributions by increasing who qualifies as experiencing adverse financial consequences.

If you qualify to take money out of your retirement, consider the following:

·        Both you and your spouse likely qualify to take distributions with the same event.

·        The amount you can take out does not have to equal your actual economic injury—you can choose how much you take out.

·        Electing to claim all the income in tax year 2020 might be tax-smart if you have a loss to offset it, or you are in a much lower tax bracket due to the economic downturn.

If you decide to repay the funds, do it strategically:

·        If you repay the entire amount, then doing so before timely filing your 2020 tax return is the best way to do it—which means before October 15, 2021, if you file with an extension.

·        If you don’t repay the entire amount and elect to spread the income over three years, you can time the repayment(s) to determine which tax years have the income, allowing you to minimize your tax bill.

One final note. The new easier relief applies to households, and that expands the possibilities for the $100,000 grab and repay for spouses and roommates.

 Candice Gerlach – https://candicegerlachcpa.com/