The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions. Continue reading
On March 13, 2020, the President issued an emergency declaration instructing the Secretary of Treasury to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency (defined as “Affected Taxpayers”).
On March 27, 2020, the IRS issued an advanced notice of Notice 2020-20 which provides additional relief from Notice 2020-18 to taxpayers who have United States Gift and Generation-Skipping Transfer Tax Returns (Form 709) and payments due on April 15, 2020 by including such taxpayers in the definition of Affected Taxpayer. The April 15, 2020 deadline is postponed to July 15, 2020. The three-month relief provided under Notice 2020-20 to an Affected Taxpayer is automatic, and therefore, there is no requirement to file an Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift Generation-Skipping Transfer Tax (Form 8892) to obtain the benefit of the filing and payment postponement deadline of July 15, 2020. However, the Affected Taxpayer must file a Form 8892 by July 15, 2020 to obtain an extension to file Form 709 until October 15, 2020. Nevertheless, any Federal gift and generation-skipping transfer tax payments will still be due on July 15, 2020.
Accordingly, the period beginning on April 15, 2020 and ending on July 15, 2020 will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file a Form 709 or to pay Federal gift and generation-skipping transfer taxes shown on the respective Form 709. Interest, penalties, and additions to tax with respect to such postponed Form 709 and payments will begin to accrue on July 16, 2020.
Please note that neither Notice 2020-18 nor Notice 2020-20 postponed the due date for filing United States Estate (and Generation-Skipping Transfer) Tax Returns (Form 706).
For additional updates related to COVID-19, please visit our resources page.
An update to this post was published May 11, 2020.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions.
Income Taxation of Retirement Plans
10 Percent Additional Tax Waived for Coronavirus-Related Distributions
Generally, the IRS imposes ordinary income tax on retirement plan distributions. The IRS also imposes a 10 percent additional tax on retirement plan distributions that are included in the distributee’s gross income unless the distributee is over the age of 59½ or another exception is met.
The CARES Act waives this 10 percent additional tax for any “coronavirus-related distribution” up to $100,000. It is not necessary that the relevant plan allowed hardship distributions prior to the CARES Act. A coronavirus-related distribution is defined as any distribution from an eligible retirement plan, which includes IRAs, IRA annuities, qualified trusts, certain other retirement annuities, and specific deferred compensation plans, made during 2020 to an individual that meets one of the following criteria (“Qualified Individual”):
- He or she is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC;
- His or her spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC; or
- He or she experiences adverse financial consequences as a result of being quarantined, being furloughed, laid off, or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
The administrator of the retirement plan may rely on the employee’s certification that the employee meets one of the above conditions to determine whether the distribution qualifies as a coronavirus-related distribution.
Three-Year Rules Related to the Income Taxation of Coronavirus-Related Distributions
Although the 10 percent additional tax is waived when the foregoing requirements are met, the IRS will generally still impose income tax on distributions from an eligible retirement plan.
To provide further relief, unless the Qualified Individual elects out of this treatment, the amount of the coronavirus-related distribution required to be included in gross income will be includable ratably over a three-year period beginning with the year of the distribution. In other words, the tax liability payments may be spread out over this three-year time period.
Further, a Qualified Individual may repay an amount up to the amount of the coronavirus-related distribution to the eligible retirement plan within the three-year period beginning with day after the date of the distribution. If the Qualified Individual repays the corona-related distribution, then the Qualified Individual will be treated as transferring the repayment tax-free to the eligible retirement plan and the repayment will not affect the cap on retirement account contributions.
Loans from Qualified Employer Plans for Coronavirus-Related Relief
The CARES Act provides more flexibility for Qualified Individuals to take out loans from qualified employer plans, which includes a 401(a) plan, certain annuity plans, and certain 403(b) plans. Prior to the CARES Act, an individual could take out a loan without it being treated as a distribution from a qualified employer plan in the amount that was the lesser of $50,000 or one-half of the value of the account balance. For the 180-day period beginning on March 27, 2020, a Qualified Individual may now take out a loan up to the lesser of $100,000 or the full value of the account balance.
Additionally, if a Qualified Individual has an outstanding loan from a qualified employer plan that is due between March 27, 2020 and December 31, 2020, the due date will be delayed for one year; however, interest will accrue during such delay. The one-year delay will not count toward the five-year requirement that a loan from a qualified employer plan be repayable within five years.
Required Minimum Distribution Rules for Retirement Plans
Temporary Waiver of Required Minimum Distribution Rules
For 2020, the required minimum distribution (“RMD”) requirements for certain defined contribution plans and individual retirement plans do not apply. This includes any RMD, including RMDs from 2019, that are required to be made in 2020 as long as it was not made before 2020. This includes RMDs that were required to begin in 2020 due to an owner turning 70½ in 2019.
Similar to the relief provided in 2009 as a result of the economic recession, amounts distributed in 2020 that would otherwise have been an RMD are eligible for rollover, subject to limitations.
There are also various provisions related to plan amendments.
For individuals who do not itemize deductions, the CARES Act provides a new above-the-line deduction for qualified charitable contributions up to $300 annually. To qualify, the contribution must be made in cash to a 170(b)(1)(A) organization, which does not include a 509(a)(3) supporting organization or a donor advised fund.
The CARES Act also provides benefits for individuals and corporations who itemize deductions when such taxpayers contribute cash to a 170(b)(1)(A) charitable organization (not including a 509(a)(3) supporting organization or a donor advised fund) and elect for such benefits to apply (“Qualified Contribution”). In the case of a partnership or S-corporation, the election for such benefits to apply must be made separately by each partner or shareholder.
For individuals who itemize deductions, the CARES Act removes the cap (which was 60 percent of adjusted gross income) for 2020 on the deduction for a Qualified Contribution. Thus, an individual who itemizes deductions may deduct a Qualified Contribution to the extent such contribution does not exceed the individual’s adjusted gross income. An individual may carry over and deduct the excess Qualified Contribution over the following five-year period.
For corporations, the CARES Act changes the limitation from 10 percent to 25 percent of the corporation’s taxable income on the deduction for a Qualified Contribution for 2020. The corporation will also be able to carry over and deduct the excess Qualified Contribution in the following five years, subject to limitations.
Finally, the CARES Act changes the limitation from 15 percent to 25 percent of net income on the deduction for a charitable contribution of food inventory from a trade or business during 2020.
For additional updates related to COVID-19, please visit our resources page.
Earlier this week, the President signed the “Setting Every Community Up for Retirement Enhancement Act” (the “SECURE Act” or the “Act”), a measure affecting retirement benefits that was passed by the House and Senate last week. The Act notably increases the age for beginning required minimum distributions (“RMD”) to 72 (for those owners who have not attained the age of 70½ by 12/31/2019), eliminates the age restriction on deductible IRA contributions, and allows penalty-free withdrawals for births and adoptions. The Act also makes it easier for employers to offer annuities which could provide employees with a reliable income stream in retirement, a move that has attracted mixed reviews.
Perhaps most notably, the SECURE Act makes significant changes to the rules regarding beneficiaries of retirement accounts after the death of the owner. The Act institutes a new “10-year rule” requiring many beneficiaries to withdraw the entire balance of the account within 10 years (similar to the prior five-year rule). The new 10 year rule applies to all “designated beneficiaries” who are not “eligible beneficiaries.” Individuals treated as eligible beneficiaries include the surviving spouse, persons not more than 10 years younger than the account owner, minor children (until obtaining age of majority), disabled persons, and chronically ill persons. There are no changes to the payout or rollover provisions for a surviving spouse beneficiary.
Beneficiaries not treated as an “eligible beneficiary” fall into two categories: designated beneficiaries and non-designated beneficiaries. If the beneficiary is a designated beneficiary, such as a named individual who does not qualify as an eligible beneficiary, then the account payout must occur within 10 years. The new “10-year rule” is expected operate in the same fashion as the familiar five-year rule in that distributions must be made “within 10 years after the death” of the deceased account owner. This means that there would be no required minimum distributions the account payout must occur within 10 years. Presumably, the beneficiary could decide in which manner to withdraw the funds (10 percent each year, nothing in years one through nine and the entire amount in the tenth year, etc.) as long as the entire amount is withdrawn within 10 years.
A non-designated beneficiary’s payout depends upon the timing of the account owner’s death. If the account owner died before starting RMDs, then the account payout must occur under the familiar five-year rule so that the account payout has completed within five years from the death of the account owner. If the account owner died after starting RMDs, then the remaining account payout is done over the account owner’s remaining life expectancy.
We would be delighted if you could join us for our upcoming seminar for those seeking guidance with IRA planning. Williams Parker attorneys Colton F. Castro and Alyssa L. Acquaviva will provide the necessary knowledge to enable IRA account owners to make informed decisions about how to structure their estate plan and IRA beneficiary designations in a manner that best fits tax planning and personal goals.
Wednesday, March 27, 2019
8:30 – 10 a.m.
Art Ovation Hotel
1255 North Palm Avenue, Sarasota, FL 34236
- Wealth management strategies for IRA account owners
- Minimum required distribution requirements and timing
- Tax penalties and how to avoid them
- Tax laws regarding the inheritance of IRAs, including rollovers and beneficiary designations
- Charitable planning involving IRAs
- Structuring an estate plan to maximize the benefits available to IRA account owners and their beneficiaries
Please feel free to share this information with anyone who may be interested and please contact us with any questions. We hope to see you there!
The Tax Cuts and Jobs Act, with a clear emphasis on job creation, introduced major tax changes for businesses. However, it also included a doubling of the exemption amount for federal estate, gift, and generation-skipping transfer tax purposes. With the increased exemption expected to sunset on December 31, 2025, or earlier, now is the time for persons with taxable estates to consider how best to use and lock-in the increased exemption. For those persons safely under the current and prior exemption, care needs to be taken that their current documents do not result in a misallocation of assets where such allocation is tied to the exemption amount.
A recent presentation given to the FICPA explores these issues as well as other changes that may affect estate planning and administration.
Williams Parker will lead a discussion on the Tax Cuts and Jobs Act tomorrow for the FICPA Gulf Coast Chapter at the Sarasota Yacht Club. Beginning at 8:30 a.m., the seminar will focus on the new carried interest rules, the new Section 199A qualified business income deduction, changes in the estate and gift tax and certain international provisions, and updates on tax controversy and IRS practice and procedure. Presenting on these topics will be attorneys from our Estate Planning, Corporate, and Tax practices. Three CPE credits will be provided.
John Wagner is a board certified tax attorney and chair of Williams Parker’s Corporate and Tax practices. He represents executives, entrepreneurs, and real estate investors in tax, transactional, capital raising, estate planning, and estate administration matters.
Michael Wilson is a board certified tax attorney with Williams Parker in Sarasota. He practices tax, corporate, and business law handling sophisticated tax planning and tax controversy matters and advising clients on their most significant business transactions.
Jamie Koepsel is a corporate and tax attorney with Williams Parker in Sarasota. His experience includes handling federal and state tax issues for individual and business clients.
Daniel Tullidge is a trusts and estates attorney with Williams Parker in Sarasota. He focuses on taxation, estate planning, and estate and trust administration.
Nicholas Gard is a corporate and tax attorney with Williams Parker in Sarasota. His experience includes work on a variety of tax matters, including federal tax litigation, tax disputes with the Internal Revenue Service at the examination and appeals levels, and international tax issues involving tax treaties, transfer pricing, and cross-border investments and business operations.
Tuesday, May 1, 2018
8:30 – 11:30 a.m.
(Add to calendar)
Sarasota Yacht Club
1100 John Ringling Blvd, Sarasota, FL 34236
Breakfast and CPE credits will be provided.
Register now at FICPA.org or by phone at (800) 342-3197.
We look forward to seeing you tomorrow as we share technical information, new developments, and practical advice on the Tax Cuts and Jobs Act.
One of the more visible changes from the Tax Act will be the increase in the standard deduction. When completing an annual tax return, a taxpayer has the choice to either take a standard deduction or to itemize deductions. The standard deduction is a flat dollar amount which reduces your taxable income for the year, with the same standard deduction amount applying to every taxpayer who takes the standard deduction. The itemized deduction instead allows a taxpayer to deduct a number of different expenses from throughout the year, including certain medical expenses, mortgage interest, casualty and theft losses, state and local taxes paid, and charitable contributions. Whether a taxpayer uses the standard deduction or itemizes his or her deductions will depend on whether that taxpayer’s itemized deductions exceed the standard deduction amount.
In 2017, the standard deduction amount was $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly. The Tax Act has nearly doubled these amounts for 2018, with the standard deduction increased to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly. Limitations have also been placed on deducting state and local taxes (capped at $10,000) and on mortgage interest (limited to new loans, capped at $750,000).
Taxpayers now have a higher standard deduction amount they need to pass before itemizing their deductions and they have more limited expenses available in order to get over that bar. Fewer people will be generating the expenses needed to make itemizing deductions worthwhile. The Tax Policy Center estimates that the percentage of taxpayers itemizing deductions will drop from 30% to only 6%.
If fewer taxpayers are itemizing their deductions, the tax benefits of charitable giving will be available to fewer taxpayers. The Tax Policy Center estimates charitable giving to drop anywhere from $12 billion to $20 billion in the next year. Taxpayers may instead bunch their charitable gifts into a single year, itemizing their deductions in such a year while using the standard deduction in subsequent years rather than spreading out these gifts over a stretch of years.
People charitably give to their favorite organizations out of a humanitarian desire to help less fortunate people and to benefit the wider community; a smaller tax incentive will not change this. But the smaller tax incentive is expected to have a negative impact both for a taxpayer’s ability to deduct charitable gifts and for the amount of gifts charitable organizations expect to receive.
As mentioned in several recent posts, the proposed regulations under Code Section 2704 are aimed at reducing valuation discounts associated with transfers of interests in family-controlled businesses. So that the proposed regulations capture certain entities that may be disregarded for federal income tax purposes, such as single-member limited liability companies, the definition of a family controlled entity under the regulations casts a wide net. In fact, this net is so expansive that it has the ability to reach certain business arrangements that are significantly different from the typical family business.
Consider, for example, three siblings who own a vacation home as tenants-in-common. Assume that the siblings have executed a co-tenancy agreement that restricts each tenant’s ability to partition and sell their interest (as many of these agreements do). If this arrangement constitutes a controlled entity under the proposed regulations, then the regulations would apply to this co-tenancy arrangement in generally the same manner that they would apply to an active trade or business. Should the proposed regulations apply, if a co-tenant transfers his or her interest in the vacation home (either during life or at death), the value of this interest for transfer tax purposes may be computed without regard to the restriction on partition in the co-tenancy agreement and, in turn, any valuation discounts that this restriction may warrant. In this event, the application of the proposed regulations may result in a higher gift or estate tax value associated with this transfer.
This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.
View previous posts:
- 2704 Regulations Explained: Winners and Losers of Proposed §2704 Regulations, Is the IRS a Loser?
- 2704 Regulations Explained: Why is the IRS Targeting Valuation Discounts on Family Controlled Entities?