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Economic Insights

Most people have heard about the $1,200 virus-related recovery checks paid to individuals, but may not be aware of specific tax-relief provisions that are also available.

Read time: 2 minutes

In response to the significant economic harm that COVID-19 is causing many U.S. taxpayers, the federal government is offering specific tax-relief initiatives for individuals that go beyond the $1,200 recovery checks* that we hear so much about.

We start with one initiative, courtesy of the IRS, that everyone should be familiar with by now: the extension of due dates for filing and paying taxes.

Individual taxpayers have until July 15, 2020, to file their federal income tax returns (2019 Form 1040) and make their associated payments.

This relief also includes quarterly estimated payments, with those scheduled for April 15 and June 15 postponed to July 15. Most states have also automatically extended the due date to file and pay income tax returns to align with federal income tax return due dates.

Qualified individuals can now withdraw up to $100,000 from qualified retirement accounts without being subject to the 10% early withdrawal penalty.

In order to be exempt from the 10% early (before age 59½) withdrawal penalty, the withdrawal must be for a coronavirus-related purpose. Income from the withdrawal will still be subject to income tax; however, the taxes can be paid over a three-year period. Individuals can also pay back the withdrawal within three years and reclaim any taxes paid.

Moreover, there are no limitations on what you can use the funds for during the three-year period. If you’re cash-strapped, you can use the money to pay the bills and recontribute later when your financial situation has improved.

To be considered a qualified individual, an applicant must:

  • be diagnosed with COVID-19;
  • have a spouse or dependent who is diagnosed with COVID-19;
  • experience adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to the virus;
  • be unable to work due to lack of childcare because of the virus; or
  • own a business that had to close or operate under reduced hours due to the virus; or
  • any other factor as determined by the IRS.

Required minimum distributions (RMDs) are waived for 2020.

Normally, an individual is required to receive minimum distributions (RMDs) from IRAs and certain retirement accounts once they reach 72 years old

But RMDs on all retirement plans are suspended for 2020. The suspension includes any RMD scheduled to be taken in 2020 (even those from the 2019 tax year) and it applies to both account owners and beneficiaries of inherited accounts.

Individuals who do not itemize their deductions will be eligible to take a $300 “above the line” deduction for cash contributions to charitable organizations during 2020.

Normally, individuals can only deduct charitable contributions if they itemize their income tax returns. Above-the-line deductions let you deduct certain items without itemizing.

Also, for individuals who itemize, the deduction for an annual charitable contribution is normally limited to 50% of an individual’s adjusted gross income. That limitation has been suspended for 2020.

Contributions to a retirement plan and a healthcare savings account can be made as late as July 15, 2020.

Prior to the tax-relief changes, an individual’s 2019 contributions to a retirement account and a healthcare savings account had to be made no later than April 15, 2020. The extension of the time due was made to align with the revised 2019 tax return date.

An unprecedented crisis resulted in an unprecedented relief response from various government agencies including the IRS. Additional relief is being discussed and may be forthcoming. The massive governmental response is generally welcomed, but adds to the complicated nature of taxes. Now more than ever, it’s important to stay informed by consulting with your tax and financial advisors. Be safe, stay calm, and keep informed.

 

 

*Under the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), an individual may receive up to $1,200 and married couples up to $2,400. Persons with under-age-17 dependent children can receive up to another $500 per child. However, these payments are phased out at higher levels of adjusted gross income (AGI). For details, go to the IRS website to access Information Release IR-2020-61 for FAQs and answers about economic impact payments.

 

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client.

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