Welcome to the first week of May 2020. It's a decidedly weird month, in large part because of the coronavirus pandemic.
When the deadly COVID-19 infection started spreading in force across the United States, most of the country shut down to some degree. Now many states are loosening their stay-home orders and things are starting to some degree to get back to normal, or what will pass as that status for a while.
That revival of activities extends to taxes.
That time shift effectively has made this May, which is around 10 weeks away from Tax Day, the new February. So millions of us who haven't filed now must start gearing up for that annual impending tax task.
And on this May 4th, there's no better blogging way to do that than with a Star Wars' inspired May the Tax Fourth be with you.
So unsheathe your light saber. (A possible deductible office supply item for an electronics evaluator?) Crank up your version of the Millennium Falcon. (Potentially deductible business mileage for classic vehicles reseller?) Let loose your best Chewbacca howl. (Voice lesson deduction for an actor's job skill enhancement education?)
Here we go with the debut of the Star Wars COVID-19 tax sequel: 4 May Coronavirus Tax Moves.
1. Tapping retirement accounts: In any other May, it would be post-filing time and I'd be recommending that you reassess your retirement plans and, if financially feasible, put a little more into your IRA or 401(k). Again, not a usual tax year.
Now, instead of suggesting you add to your retirement stash, I'm alerting you to a Coronavirus Aid, Relief and Economic Security (CARES) Act change that gives you access to money in qualified retirement plans. If you've taken a financial hit from COVID-19, the law makes it easier to take money — specifically withdrawals of up to $100,000 — from your nest eggs.
You won't face the usual 10 percent early distribution tax if you're younger than 59½. You also won't owe any tax on the distribution as long as you pay it back within three years.
There also are eased rules allowing for loans, again up to a $100,000 maximum, from qualified retirement plans. If you've already taken out a retirement plan loan, you can defer those repayments for one year.
So who qualifies for this easier access to retirement money? The CARES Act considers you as being COVID-19 affected if you're diagnosed with the virus, have a spouse or dependent diagnosed with it or experience adverse financial conditions because you were quarantined, furloughed, laid off, had hours reduced, couldn't go to work due to lack of child care or, as a business owner, had to close or reduce your enterprise's operation hours.
And which plans can be tapped? The new law allows for distributions from IRAs, employer retirement plans (typically 401(k) accounts), 457(b) plans and 403(b) annuities.
2. Economic relief payments: Some folks find they need to take out retirement money because other government financial support is coming up a bit short. Yep, I'm talking about the COVID-19 economic impact relief payments, also created as part of the CARES Act.
These payments, often referred to as coronavirus stimulus checks, are a maximum of $1,200 per taxpayer ($2,400 for married couples filing jointly), with an additional $500 rebate for each qualifying child.
Since the relief payments are, for many, not quite enough or are slow in arriving — You can check your COVID-19 economic relief payment status at the IRS Get My Payment online tool (its sequel has been improved). — many out-of-work individuals have applied for unemployment. If you're among that group and were able to maneuver your state's unemployment benefits maze, good for you. Those monthly benefits could help until your company reopens and puts you back on payroll.
Note, however, that while your COVID-19 payment isn't taxable income, any unemployment benefits you got or get are, at least at the federal level. Also, most states that collect income taxes from their residents also consider unemployment benefits as taxable income.
According to Kiplinger Tax Letter, 33 states and District of Columbia fully tax the out-of-work payments. Indiana and Wisconsin tax them in part. Only Alabama, California, Montana, New Jersey, Pennsylvania and Virginia consider unemployment benefits as nontaxable. (Remember, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming don't tax individual income.)
3. Charitable contribution changes: If you're able to weather the coronavirus financial storm, consider helping others in not such solid shape. The CARES Act also expands the tax-favored way to do this.
Donations to IRS-approved charities have long been a tax deduction for folks who itemize. But most filers claim the standard deduction. Now they get a tax break of up to $300 for their goodwill. It's a new adjustment to income, also still referred to by some of us in the tax community as an above-the-line deduction, that will be added to Form 1040's Schedule 1. These adjustments/deductions reduce your total income to a lower adjusted gross income (AGI) that, in most cases, means a smaller tax bill.
This new $300 charitable deduction is only available to nonitemizers. It also applies only to contributions of cash (not goods), which under the tax definition is not just currency, but also donations made by credit card.
Itemizers, however, also get a boost in the CARES Act. The new law temporarily lifts the giving limit from 60 percent of AGI to 100 percent of AGI. This, lawmakers hope, will encourage wealthy donors to give more.
4. Figure out how you'll pay any due taxes: Taxes are, of course, all about the money. But as we already know, this year Uncle Sam has adjusted his approach due to the coronavirus. Treasury and the IRS extended the filing season, giving all of us who owe, whether a 2019 tax bill or our first two 2020 estimated tax payments, longer to come up with the money.
So do at a quick review of your taxes to see if you will owe. This advance warning means you still have time, 10 weeks out until the July 15 deadline, to explore ways you're going to pay.
If you're a worker who pays estimated taxes but have lost your job or had your hours dramatically cut, the only glimmer of good news is that those April and June 1040-ES payments due in July will be smaller. Refigure them now and see if perhaps it's worth paying them using the annualized income estimated tax method.
As for a 2019 tax return bill, look into the various payment options the IRS offers. In addition to credit cards that could help you if your bank account is a little light, the IRS has installment payment options.
It's never fun to face any tax bill, but knowing what you owe and planning how to pay is always better than being shocked at the filing deadline.
More May tax moves: These four tax-centric May the Fourth Be With You items are just a few of the tax moves you can consider this month.
You can find more, as happens early each month, over in the ol' blog's right-hand column in the May Tax Moves suggestions. This regularly updated tax to-do list starts under the red Tax Moves image, which itself is just below the countdown clock ticking off the remaining days, hours, minutes and seconds to the July 15, 2020, Tax Day.
I know taxes are rarely on the top of anyone's favorite diversions, but getting ready now for the upcoming tax deadline is a way to break the COVID-19 self-isolation boredom and get some necessary things done before, we hope, things go back to normal and your life gets more hectic.
Newer Star Wars: Finally, a few words about one of the best space/science fiction franchises ever. The first Star Wars movie came out when I was in college. I remember standing in line, which stretched deep into the mall theater's parking lot, to see it (several times).
Regardless of George Lucas' numbering of prequels and sequels, the 1977 Star Wars will always be Number 1 in both how I count and rate the films. That's why that Star War's cantina scene tops this post.
But I'm not totally stuck in the past. And I'm a big fan of The Mandalorian. Yes, it's why I pay for Disney+. And yes, I'm going to watch The Mandalorian documentary's first episode this afternoon.
So to acknowledge the enduring allure of Star Wars old and new, I leave you with the best new inhabitant of its wondrous world, Baby Yoda.
|Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.