Laurie Haelen, AIF®
Senior Vice President - Wealth Solutions
[email protected]941.366.7222 x41970
Two emergency relief bills passed in 2020
in response to the COVID-19 pandemic will
make this an unusual tax season for many
taxpayers. The Coronavirus Aid, Relief,
and Economic Security (CARES) Act was
passed in March, and a second relief
package was attached to the Consolidated
Appropriations Act, 2021, in December.
The following provisions may affect many
households when they file their personal
tax returns for 2020. You might consult
a tax professional who can explain the
changes and recommend strategies to
help reduce your tax liability for 2021.
Recovery Rebate Credit
Most U.S.
households received two Economic
Impact Payments (EIPs) from the federal
government in 2020. They are not taxable
because technically they are advances on
a refundable credit against 2020 income
taxes.
The CARES Act provided a Recovery
Rebate Credit of $1,200 ($2,400 for
married joint filers) plus $500 for each
qualifying child under age 17. The second
bill provided another $600 per eligible
family member.
Any individual who has a Social Security
number and is not a dependent generally
qualifies for the payments, up to certain
income limits. The amounts are reduced
for those with adjusted gross incomes
(AGIs) exceeding $75,000 ($150,000 for
joint filers and $112,500 for heads of
household) and phase out completely at
AGIs of $99,000 ($198,000 for joint filers
and $112,500 for heads of household).
In order for the money to be delivered
quickly, eligibility was based on 2019
income tax returns (or 2018 if a 2019
return had not been filed). Eligible
taxpayers who did not receive two full
payments, possibly due to errors or
processing delays, may claim the money
as a Recovery Rebate Credit on their 2020
tax return. Households that reported a
lower AGI in 2020 (or added a dependent)
might be eligible for additional funds. To
calculate the credit, filers will need to
know the amounts of any payments they
already received. The credit amount will
increase the refund or decrease the tax
owed, dollar for dollar.
Taxpayers who received two full payments
don't need to fill out any additional
information on their tax returns.
Coronavirus-related distributions
Another
measure in the CARES Act allowed IRA
owners and employer-plan participants
who were adversely affected by COVID-19
to withdraw up to $100,000 of their vested
account balance in 2020 without having to
pay the 10% tax penalty (25% for SIMPLE
IRAs) that normally applies prior to age
59½.
Still, withdrawals from tax-deferred
retirement accounts are typically taxed
as ordinary income in the year of the
distribution. To help manage the tax
liability, qualified individuals can choose
to spread the income from a coronavirus-related distribution (CRD) equally over
three years or report it in full for the 2020
tax year, with up to three years to reinvest
the money in an eligible employer plan or
an IRA.
Taxpayers who elect to report income
over three years and then recontribute
amounts greater than the amount reported
in a given year may "carry forward" the
excess contributions to next year's tax
return. Taxpayers who recontribute
amounts after paying taxes on reported
CRD income can file amended returns to
recoup the payments.
Qualified individuals whose plans did
not adopt CRD provisions may choose
to categorize other types of distributions
— including those normally considered
required minimum distributions — as
CRDs on their tax returns (up to the
$100,000 limit).
Last year was unpredictable, and your
financial situation may have been far
from normal. As always, CNB Wealth
Management's financial planning team is
here to answer any questions you may have.
CNB Can Help
Have questions about how pandemic relief measures may affect your tax return? Contact me at (585) 419-0670, ext. 41970 or by email at [email protected].
©2021 Broadridge Investor Communication Solutions, Inc. All rights reserved. This material provided by Laurie Haelen.
This material is provided for general information purposes only. Canandaigua National Trust Company of Florida is an affiliate of Canandaigua National Bank & Trust. Investments are not FDIC insured, not bank deposits, not obligations of, or guaranteed by, Canandaigua National Bank & Trust or any of its affiliates, including Canandaigua National Trust Company of Florida. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please contact your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.