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What You Need to Know About the CARES Act

Monday, June 1st, 2020 | Uncategorized | No Comments

Did you receive unemployment benefits?  Did you know those unemployment benefits are taxable? 

The answer is yes.  One part of the CARES Act (Stimulus Package) provides those eligible for unemployment benefits are entitled to an extra $600 a week on top of the standard weekly benefit.  The payment of the unemployment benefits has also been extended by 13 weeks.  And for the first time these benefits are available to out-of-work self-employed workers.  Generally, out-of-work individuals may qualify up to $875 per week.  These unemployment benefits will likely be a financial lifeline during this financial crisis.  However, before you start making plans to spend all of that money on essentials and bills, you should be aware that unemployment benefits are considered income, which means you will likely pay income taxes on this income.  For example, if you receive the $875 benefit for 26 weeks, you would receive unemployment benefits totaling $22,750.  When included with your other taxable income sources, these benefits could increase your tax liability.  If you happen to be in the 25% income tax bracket, you could see a $5,688 increase in your income tax liability. 

Did you know you can forego your 2020 Required Minimum Distribution (RMD)? 

All Required Minimum Distributions (RMDs) have been waived for 2020.  This waiver includes Traditional Individual Retirement Accounts (IRAs), 401(k), 403(b), 457(b), and inherited plans.  You should use this opportunity to revisit your retirement plans to determine how you can use it to optimize your plan.  If you have already taken your RMD for 2020, you may be able to pay it back.  There is a permanent rule that allows a withdrawal from a retirement account to be re-deposited within 60 days without tax consequences.  It can be re-deposited back into the same account or another retirement account. The 60-day limit does not apply if you have been directly impacted by COVID-19.  The CARES Act provides guidelines to determine if you qualify.  If you, a spouse, or dependent have been diagnosed with COVID-19, SARS-Co-V2 virus, you or your spouse have experienced “adverse financial consequences” from being quarantined, laid off, furloughed, had your work hours reduced, or unable to work due to a lack of child care are factors to determine if you were impacted.  You may be allowed to return only one withdrawal, and you generally must return the entire amount withdrawn.

Did you know it might be a good time to convert a Traditional Individual Retirement Account to a ROTH IRA?

Consider converting to a ROTH while the markets are low.  Some taxpayers are eligible to convert all or a portion of their Individual Retirement Account into a ROTH IRA.  The conversion is taxable in the year of the conversion.  The value of the amount converted is reported an income and included in computation of taxable income.  The value of the transfer is determined by the market value of the stock on the day of conversion.  For example, you contributed to your IRA and it was invested in stock.  The stock grew to a value of $136,000.  Today the stock is worth $100,000.  You convert it to a ROTH IRA and report and pay tax on the $100,000 value.  The stock rebounds to its pre-crash value, and now your ROTH IRA is worth $136,000.  You paid tax on the $100,000 value, and since income earned in a ROTH IRA is not taxed, you will not be taxed on any part of the ROTH IRA when withdrawn.  Thus, the $36,000 gain is tax-free.  Another benefit is our current low tax rates are expected to go up, so it may be a better time to pay the tax.  Remember withdrawals from the Traditional IRA are generally fully taxable, while amounts withdrawn from a ROTH IRA are not taxed.

Can I borrow money from my IRA?

The answer is yes. Generally, you cannot borrow from either your traditional or ROTH IRA.  However, thanks to the CARES Act, in certain situations, you may take a distribution from your IRA and pay it back.  Taxpayers under the age of 59 ½ can withdraw up to $100,000 from qualified retirement accounts and IRAs in 2020 without a 10% early withdrawal penalty if the individual meets the coronavirus-related requirements.  The 20% mandatory federal income tax withholding is waived.  If not paid back, the amount withdrawn may be included income ratably over a three year period.  If the withdrawals are repaid within three years from the date of the withdrawal, these repayments will be treated as a tax-free rollover. The factors to determine if you were impacted are the same as those listed above under ROTH conversions.  The CARES Act also increases the amount of eligible loans for some taxpayers.

Some of the details included herein are subject to change as the IRS releases its rules and regulations regarding the CARES Act.  This article is not intended to provide specific tax advice.  You should consult your legal and/or tax advisor before making any financial decisions.

The tax professionals at WarrenJackson can assist you in accessing if any of these opportunities are right for you.  Please contact one of our offices and make an appointment.

WarrenJackson, CPAs

606 South Main Street in Sweetwater

409 College Street in Madisonville

219 West Broadway Street in Lenoir City

206 N. Hill Street in Athens

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East Tennessee's Mountain Views

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