COVID-19 INDIVIDUALS UPDATES

Tax Filing and Payment Deadlines

Federal:

  • The IRS extended the April 15, 2020 filing and federal income tax payment deadline to July 15, 2020. However, we continue to work on filing returns as soon as possible.

 

  • First quarter and second quarter estimated tax payments usually due April 15th and June 15th, are now extended to July 15, 2020.

 

  • These extensions are automatic and do not require a form to be filed.  Filing an extension form will extend the due date to the usual extended due date.

 

State and Local:

  • States: Each state is approaching this crisis differently. The best source of information for a specific state is that state’s website.  The AICPA has a helpful resource that continues to be updated.

 

  • King County Real Estate Taxes: Residential and commercial taxpayers who pay property taxes themselves, rather than through their mortgage lender, can delay payment until June 1, 2020.

 

  • Pierce County: Residential and commercial taxpayers who pay property taxes themselves, rather than through their mortgage lender, can delay payment until June 1, 2020.

 

  • Other Washington Counties: Taxpayers outside of King and Pierce counties should check their county assessor’s website as additional counties may delay their payment due date.

 

 

Direct Payments from the Government

You’ve probably heard that the IRS will be sending money to most Americans in the coming days and months to help people through this time of economic uncertainty.  There are a lot of questions about these Economic Impact Payments.  Information continues to change, but here are some key details based on the current information available:

 

How Much is It? 

Eligible households will receive up to $1,200 for each adult and $500 for each child under 17.  A married couple with two kids would receive $3,400.

 

Who is Eligible? 

U.S. citizens and residents are eligible. The individual must have a social security number and cannot be the dependent of another taxpayer. 

 

Individuals will receive a full payment if their adjusted gross income is under certain thresholds ($75,000 for single or married filing separate, $112,500 for head of household, and $150,000 for married filing joint filers).  The payment amount will be reduced by $5 for every $100 of income for individuals whose income exceeds the above thresholds.  Thus, the payment is completed phased out for single filers with no kids and income over $99,000 ($198,000 for a married couple with no kids and $218,000 for a married couple with two kids).

 

How will the IRS Know Where to Send the Payment? 

The IRS will use the direct deposit information used on your tax return.  If the IRS doesn’t have your direct deposit information from your 2018 or 2019 tax return, you will be able to provide your bank information to the Treasury using a web-based portal the Treasury plans to develop in the coming weeks.  The IRS will ultimately mail you a check if it does not have your bank information.

 

How will the IRS Determine my Amount?

The IRS will use your 2019 tax return information to calculate the payment amount if it has been filed, and your 2018 tax return information if 2019 hasn’t been filed yet.  This creates a planning opportunity for individuals who had a significant change to their income between 2018 and 2019.  It could be beneficial for taxpayers to hold-off on filing their 2019 tax return if they had an increase to their income that would put them in the phase-out range or above.

 

What if my Income Was Too High in 2018 and 2019, but will be Lower in 2020? 

The final amount of the benefit will be determined based on your 2020 income tax return.  You will receive a credit on your 2020 tax return, based on your 2020 income. 

  • If you already received the full payment amount, there is no requirement to pay it back even if your 2020 income is too high.   

 

  • If you didn’t receive the full payment amount, you can receive a refundable credit based on your 2020 income.

 

Dependents over 17: 

Individuals who are over 17 and claimed on a tax return as someone else’s dependent are not eligible for the $500 payment for each child.  They can be eligible for the $1,200 payment if they file their own tax return and are not claimed as someone else’s dependent.  This is an item we are scoping as we prepare returns.

 

What About Family Members Who Don’t Make Enough to File a Return?

These individuals can file a free, basic, online form on the IRS website.

 

Phone Scams: 

The IRS will not call you about anything relating to these payments.  Hang up if anyone calls and asks for bank or other financial information.

 

Retirement Plans

Waiver of Required Minimum Distributions: 

You do not need to take a required minimum distribution for 2020.  Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70½ in 2019.

 

If you have already received your required minimum distribution for 2020 and would prefer to not take it, you may be able to recontribute it.  Taxpayers generally have 60 calendar days from the distribution date to recontribute the distribution.  The IRS recently issued a Notice allowing distributions received between February 1st and May 1st to be recontributed by July 15th.  

 

Waiver of Penalties:

Individuals under age 59½ can withdraw up to $100,000 from qualified retirement plans and IRAs during 2020 without incurring the usual 10% penalty if the withdrawal is due to COVID-19 related purposes. 

 

COVID-19 related purposes include:

  • Being diagnosed with COVID-19 through a CDC-approved test,

  • Their spouse or dependent is diagnosed with COVID-19 through a CDC-approved test, or

  • Various provisions relating to being financially injured by COVID-19 (being furloughed, laid-off, reduced hours, unable to work due to child care, closed or reduced hours for a business operated by the individual due to COVID-19, etc.).

 

Ability to Recontribute Funds:

Coronavirus-related distributions can be recontributed to the retirement account during the next 3 years (beginning on the date after the distribution).  This can be done through multiple contributions.

 

Distribution Can Be Included in Income over 3 Years:

Coronavirus-related distributions that are not recontributed will be recognized in income over the next three years, unless the Taxpayer elects otherwise.

 

Loans from Qualified Retirement Plans:

The limit on loans from a qualified plan is temporarily increased from $50,000 to $100,000 during the 180-days following March 27.  Loans that are due in 2020 can have their payment extended.

 

Charitable Contributions Changes

$300 Deduction with Standard Deduction: 

Individuals who do not itemize will now be able to claim a $300 deduction for cash charitable contributions made directly to qualifying charities.  This is not a temporary provision and applies to all tax years after 2019.

 

Increase in Allowable Charitable Contributions: 

The deduction for cash charitable contributions is generally limited to 60% of a Taxpayer’s adjusted gross income. The limit for cash donations made to public charities is increased to 100% for 2020.  No connection between the contributions and COVID-19 is required.  Donations to donor advised funds are not eligible.

 

Other Individual Considerations

Mortgage forbearance:

Lenders have been instructed to work with homeowners who have been financially impacted by COVID-19.  The lender is supposed to allow the borrower to defer payments for 3 – 12 months and add those payments to the end of the loan based on a phone call. 

 

We have had a lot of clients do this with their lender and every lender is different.  Some have been very good, made the process easy, and are complying with the program as intended.  Others are making it more difficult or are not working well with their borrowers.

 

Tax-Loss Harvesting:

Taxpayers who have no capital gains should consider selling enough loss securities to yield a $3,000 capital loss, which can be used to offset ordinary income. 

 

It is important to be mindful of the Wash Sale rule when loss harvesting.  The loss will be suspended if a similar security is purchased within 30 days before or after the sale.

 

Roth Conversions:

Individuals can convert investments in their tax-deferred retirement accounts to a Roth IRA.  The conversion is a taxable event, but the investments will then be in a Roth account and exempt from future taxation.  This can provide substantial long-term tax savings in the right circumstances.

 

Sadly, 2020 will be a low-income year for many individuals and their retirement accounts have lost value during this volatile market.  This may be a good time to evaluate a Roth conversion while asset values are low and the tax cost may be at a lower tax rate.

 

Gifting:

Gifting can be a great way to help family and friends during this difficult time, but it can also be an important part of an effective estate-planning strategy.  The gift tax consequences of making a gift is based on the value of property on the date of the gift.  This may be an opportunity to make gifts of assets that have declined in value.

 

Flexible Spending Account and Health Savings Account Expenses:

The CARES Act expands expenses that qualify for reimbursement from flexible spending accounts and health savings accounts to include certain non-prescription medical expenses.

 

Business Provisions

Qualified Improvement Property:

The 2017 Tax Law was written very quickly and there were multiple drafting errors that left the law enacted differently than Congress intended.  One of the most notable was a provision related to Qualified Improvement Property.  The CARES Act fixes this drafting error.

 

Qualified Improvement Property is generally a wide variety of interior, non-load-bearing improvements to nonresidential real estate.  The 2017 Tax Law required these improvements be depreciated over a period of 39 years.  The CARES Act changes the life to 15 years, which makes it eligible for 100% bonus.  The result is that Qualified Improvement Property can now be fully expensed in the year it is placed in service.

 

Net Operating Losses: 

Unfortunately, many businesses are facing losses due to the economic impacts from the pandemic. The CARES Act relaxes the limitations added by the Tax Cuts and Jobs Act for a company’s use of losses. 

 

For losses arising in tax years 2018, 2019 and 2020, a five-year carryback is now allowed to help businesses recover some of their prior taxes.  The 80% income limitation for net operating loss deductions is also temporarily repealed during these periods.  This change also applies to pass-through businesses and sole-proprietorships.

 

The Treasury is allowing businesses to file an application for a tentative refund and forgo filing an amended return during the next couple of months.  This significantly speeds up the refund claim and can get the cash back to the business faster.

 

 

 

Paid Family Leave

Employers of less than 500 employees are required to provide mandatory sick time and paid family leave between April 1, 2020 and December 31, 2020. Some employers with under 50 employees can be exempt.  The leave is available for up to 2 weeks of sick time and up to 10 weeks of paid family leave.  The employee is entitled to the leave before any other paid-time off or sick leave the employee is currently entitled to.

 

Employers receive payroll tax credits to cover the cost of the mandated leave.  Certain self-employed individuals also qualify for the credits.  Current Treasury guidance instructs the business to not deposit payroll taxes in the amount of the required paid sick leave payments.  The credit can be refunded in advance using forms and instructions the IRS will provide.

 

Qualifying Leave:

The 2-week paid sick leave is paid at 100% of their normal earnings, with limits, and must be provided when the employee is unable to work or telework for any of the following:

  • The employee is subject to a government isolation order related to COVID-19.

 

  • The employee has been advised by a health-care professional to self-quarantine due to concerns related to COVID-19.

 

  • The employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis.

 

The 10-week paid sick leave is paid at 2/3rds of their normal earnings, with limits, and must be provided when the employee is unable to work or telework for any of the following:

  • The employee is caring for someone who is subject to a government isolation order related to COVID-19, or has been advised by a health-care professional to self-quarantine due to concerns related to COVID-19.

 

  • The employee is caring for their son or daughter if the school of that son or daughter has been closed, or the child-care provider of the son or daughter is unavailable due to COVID-19 concerns.

 

  • The employee is experiencing another substantially similar condition as specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

 

There are limits on the amounts of paid leave and certain employers are excluded (such as employers of health care providers or emergency responders).

 

 

 

Protecting Our Clients and Staff

There are limitations on our physical work environment due to COVID-19; however, we’re working to minimize disruptions and impacts to you so that we can still offer the same level of superior service and support you have come to expect from our team.

 

We have implemented procedures to protect the health and safety of our staff, clients and community.  This includes doing all client meetings remotely.  Our staff are primarily working remotely and we are restricting access to our office to essential staff.  We strongly encourage the use of the secure online portal during this time.

 

Our Commitment to You

Our firm remains open and available to serve you.  Whether you have tax or financial planning questions or need advice on ways to navigate the expanded benefits outlined above, we’re here for you. If you have any questions or concerns, please don’t hesitate to contact us at 206-628-4991.

 

It’s more important than ever to stay connected during this unpredictable and challenging time. We’re in this together and our thoughts go out to all who have been impacted by this unprecedented situation.

 

Luby & Thomson, PLLC

11911 Northeast 1st Street

Suite 304

Bellevue, Washington  98005

(206) 628-4991

Shirlee@lubyandthomson.com