If you are considering amending your 2020 tax return, you may want to review some of the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here’s a quick summary of things to look for.
Were you Eligible for Economic Impact Payments
Individual taxpayers were eligible for Economic Impact Payments (EIP) if their reported 2019 income was $99,000 or less. For married couples filing jointly the threshold was twice that. Taxpayers with dependent children under 17 were eligible for an additional $500 per child.
Since the relief was paid in 2020, some may have assumed that they were not eligible for EIP if their income was over the established ceilings. But your 2020 income is not considered. So, you may still be able to claim an EIP rebate (rather than a check) on an amended 2020 federal tax return.
If you haven’t filed a tax return in a few years and did not receive an EIP check, you may still be able to get the relief. Since checks have already gone out, you will have to file a 2020 federal tax return to claim a rebate. This is the case even if you have zero income.
Economic Impact Payments were not taxable. They couldn’t be forfeited. And they weren’t affected if you were entitled to a 2020 tax refund.
Did you Take a Retirement Plan Distribution?
The CARES Act made two changes to retirement plan rules that may affect an amended 2020 return and your tax planning beyond that.
1) It suspended Required Minimum Distributions (RMDs)
2) It waived early withdrawal penalties
The temporary suspension of RMDs was straightforward, but its implications were significant. Sometimes retirees don’t remember to take required distributions from qualified accounts.
Since RMDs were suspended in 2020, so was the penalty for not taking them. If you forgot to take an RMD in 2020, you would not have been subject to the usual 50% penalty. That one-time relief applied only to 2020. So, be careful to take them going forward.
The CARES Act also provided relief for some people who took early withdrawals from retirement accounts like IRAs or 401(k)s. Typically, taking money from these accounts before you reach age 59½ subjects you to an early withdrawal penalty.
There are exceptions for certain hardships or life events. For example, an early withdrawal taken when you are permanently disabled is not subject to penalty; neither is a withdrawal to buy a first home.
The CARES Act created another exception. If you took money out of a retirement account to cover COVID-related expenses, then those “coronavirus-related withdrawals” would not be charged a penalty. And some of it may not be regarded as income.
Generally, distributions from retirement accounts are income in the year they are taken unless they are recontributed to a retirement account within 60 days. Under the CARES Act, coronavirus-related withdrawals can be reported as income in 2020 or spread equally over three years.
The same three-year timetable applies to coronavirus-related withdrawals that are then recontributed to a retirement account. Those recontributed coronavirus-related withdrawals become deductible from income in the year they are made. So, even if you didn’t recontribute a 2020 withdrawal, you still may have a couple years to do so.
This creates tax planning opportunities for 2021 and 2022. So, consider these scenarios if you will be amending a 2020 return. Recontributing some or all of your distribution back into a retirement account may reduce income and could entitle you to a refund.
Other CARES Act Benefits to Consider
The CARES Act offers two benefits if you made charitable contributions in 2020.
1) You can deduct 100% of your cash contributions if you itemize
2) If you don’t itemize, you can deduct up to $300 of cash contributions
If you own a business that made certain qualifying improvements to the interior of a commercial building, you can expense 100% of them in 2020.
Finally, these are all temporary changes. To determine their applicability to your unique situation, you should consult with a qualified tax professional or CPA.