By Jim Terwilliger
Most likely, you are busy getting your 2020 income taxes prepared and filed.
Whether you use tax-preparation software or work with a professional tax preparer (which we recommend for a variety of reasons), there are many changes from the previous year that should be on your radar.
Most are changes resulting from the SECURE and CARES acts as well as IRS Notices issued last year to clarify and enhance some CARES Act provisions. The CARES Act was the initial federal legislation providing financial relief to individuals and businesses following the onset of the coronavirus pandemic.
• Required Minimum Distributions (RMDs). A big change in 2020 for folks age 72 or older was the waiving of RMDs for IRAs, inherited IRAs and employer retirement plans. While distributions from these accounts are always permissible, those who do not need all or portions of their RMDs welcomed this waiver with open arms.
Early last year, those who started taking distributions (and wished they had not) were allowed one reversal following the standard 60-day once/year rollover rule. This was followed by two successive relaxations such that any unwanted 2020 distributions could have been reversed if rollovers back to an IRA were completed by Aug.15.
If you carried out such rollovers, you received 2020 Form(s) 1099-R documenting all distributions. These distributions must be reported on your federal tax return. However, any rollovers back to your IRA are not taxable and are subtracted from the gross distribution amount. Be sure to tell your tax preparer of any rollovers, otherwise you will be taxed unnecessarily.
• Coronavirus Related Distributions (CRDs). The CARES Act also allowed up to $100K in taxable distributions from individual and employer retirement plans without an early-withdrawal penalty for those impacted medically or financially by the pandemic. The default tax treatment for such distributions will spread taxation out over three years starting with 2020 tax year.
An option is to pay the entire tax obligation in the first year — 2020. Another is to repay all or a portion of the original distribution within three years. Distribution repayments can be made to any pre-tax retirement plan, and such repayments will reduce the taxable portion of the original distribution by the repayment amount.
• Qualified Charitable Distributions (QCDs). Distributions up to $100K/year per person can be made directly from an IRA to a public charity (not a donor-advised fund) by folks who are age 70 1/2 or older. While this feature remained unchanged in 2020, QCDs took on a new perspective since they were not useful last year for offsetting the taxability of RMDs. However, for folks who are taking the standard deduction for 2020, donating to charity via QCDs still remained the charitable-giving method of choice.
Be aware that if you made 2020 QCDs, you still received a Form 1099-R for that IRA documenting all distributions, including QCDs. Like rollovers back into an IRA, described above, the taxable portion of your distributions will be reduced by your total QCDs. Again, be sure to tell your tax preparer of any QCDs to ensure you do not pay tax on such distributions.
• Contributions of Cash to Public Charities. Lots of changes here for 2020. For those making large charitable gifts and therefore choose to itemize deductions, cash gifts to public charities (not donor-advised funds) up to 100% of adjusted gross income (AGI) can be deducted for 2020. Normally, the limit is 60%. (2020 deductibility for gifts of appreciated securities remains at 30%.) For gifts exceeding these limits, deductions can be carried forward for up to five additional tax years.
Further, an up-to-$300 “above-the-line” deduction for cash gifts to public charities (again, not donor-advised funds) is available for 2020 tax year for those who take the standard deduction.
The recent federal Consolidated Appropriations Act of 2021 extends both cash contribution options described above. Additionally, the above-the-line deduction for 2021 tax year is increased to $600 for joint returns. The 2020 deduction is limited to $300 per return, not person.
• NYS Tax Credit for Qualified Long-Term Care Insurance Premiums. Previously, New York income taxes could be reduced by a credit equal to 20% of qualified premiums paid for long-term care insurance regardless of income. Starting 2020 tax year, the credit is disallowed for taxpayers having a NYS AGI exceeding $250K, single or jointly filed. Also, the credit is now limited to $1,500.
Tax rules seem to be changing at an ever-increasing pace. Consult with your tax preparer and financial planning adviser to ensure you are taking advantage of all the options available to you and that your financial plan is adjusted as necessary.
James Terwilliger, CFP®, is senior vice president, senior planning adviser, CNB Wealth Management, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at email@example.com.