Your Year-End CARES Act Checklist

If you’re like many people, you may not have been paying a lot of attention to the details of the Coronavirus Aid, Relief and Economic Security (CARES) Act when it was enacted in March of this year. This legislation is designed to provide financial aid and relief to Americans affected by the economic impact of COVID-19. 

While a few of its provisions will still be available in 2021, several expire on December 31, 2020. That’s why it’s worth considering which, if any, may be worth taking advantage of this year.

2020 Required Minimum Distribution waivers

If you’re required to take Required Minimum Distributions (RMDs) from your retirement plans and IRAs, you normally have until the end of the year to take them.

In 2020, you get a reprieve. If you haven’t taken your RMD yet, and you don’t need the money, you can choose to waive it this year. Keeping this money in your accounts gives it another year to grow on a tax-deferred basis, which may help to boost the value of your retirement nest egg. And it can help you avoid increasing your taxable income for 2020.

If you have a Traditional IRA and are thinking of directly transferring (also called converting) some of these assets to a Roth IRA, the CARES Act offers a unique opportunity.  Typically, you may only convert Traditional IRA assets to Roth IRA assets after you’ve completed your RMD (that is, RMD withdrawals may not be used for Roth conversions). These combined distributions are counted as taxable income.

But under the CARES Act, you can avoid taking the tax hit of the RMD in 2020 when you’ve completing a Roth conversion. For example, say your 2020 RMD is $40,000 and you also want to convert $50,000 of your Traditional IRA assets to a Roth IRA. If you don’t waive the RMD, the combined taxable income from both events would be $90,000. However, if you waive the RMD, only the $50,000 you convert will count as taxable income this year.

Some people use a Roth conversion as an estate planning strategy. By prepaying the taxes on the converted amount, they enable their heirs to inherit the Roth IRAs, from which withdrawals are tax free.

This special waiver expires on December 31, 2020.

Enhanced charitable deductions

If you don’t itemize tax deductions, the CARES Act lets you take a one-time deduction of up to $300 for cash gifts made to qualified charitable organizations in 2020.

If you can itemize deductions, you can deduct all of your cash donations, up to 100% of your adjusted gross income (AGI). Before the CARES Act, the value of these donations capped out at 60% of your AGI.

If you own a business, the CARES Act increases the available deductions on qualified charitable cash contributions from 10% to 25% of your company’s taxable income.

The key word in all of these situations is cash. You won’t get these enhanced deductions for donating securities, artwork or collectibles.

The CARES Act states that these provisions are effective for tax years starting in 2020 but doesn’t specify an end date. This suggests that these special charitable provisions may be available in 2021 and beyond.

COVID-19 related early withdrawals from retirement accounts

If you’re under age 59½ and you, your spouse or other dependents are diagnosed with COVID-19 or you face financial hardships (such as losing your job) as a result of this crisis, you can withdraw up to an aggregated total of $100,000 from your retirement plan and IRA accounts without having to pay early withdrawal penalties. You can also waive the 20% mandatory federal tax withholding.

You may need to provide documentation that these withdrawals are being used for COVID-19 relief purposes. And keep in mind that these withdrawals will still be taxable as ordinary income. Fortunately, you can spread the taxes you’ll have to pay over a three-year period, rather than having to declare the total amount withdrawn as taxable income on your 2020 tax returns.

You can also recontribute the amount you withdraw at any time over the next three years and request a federal tax refund for the taxes you've paid. For example, you can take a COVID-19-related distribution in 2020, spread the amount as taxable income for 2020, 2021, and 2022, and repay the full amount to one of your retirement accounts in 2022. In 2022, you can file amended federal income tax returns for 2020 and 2021 to claim a refund of the taxes you paid each year on the original distribution. And you won’t have to include any income from that distribution on your 2022 federal tax return. Note that these refile/refund provisions may not necessarily apply to any state taxes you paid on this distribution. That's why it’s best to speak with your accountant or tax professional before you implement such a strategy.

And as tempting as it may be to make these withdrawals, it should be the option of last resort. This money is meant to be used during your retirement, and any withdrawals you make before that time could affect your ability to live the way you want after you retire.

This special provision expires on December 31, 2020.

Expanded flexibility for Health Savings Accounts and Flexible Savings Accounts

If you have a tax-free Health Savings Account (HSA) or Flexible Saving Account (FSA) that lets you pay for healthcare-related expenses not covered by your employer’s healthcare plan, you can now use these accounts to pay for over-the-counter medications without having to get a prescription first.  Funds in these accounts can also be used to cover the costs of menstrual products.

This is a permanent change.

Coverage of remote care and telemedicine

The CARES Act now authorizes high-deductible health plans (HDHPs) to pay for the costs of telemedicine and other remote care services even before participants have paid their full deductible.

This is good news if you have an HSA paired with a HDHP, because now you may not have to tap into your account to pay for these services. Before the CARES Act, if your HDHP paid for remote healthcare services it could have made you ineligible to receive the tax-free contribution and withdrawal benefits of your HSA.

It's important to note that not all HDHPs subsidize remote healthcare services. And these benefits will probably expire when the COVID-19 crisis ends. Contact your company’s benefits administrator to find out if your plan covers.these services.

Weigh your options carefully

While it might be tempting to rush to take advantage of some of these CARES Act-related provisions before year-end, you may want to meet with a financial advisor to help you understand their potential impact on your taxes and personal finances.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer before implementing any of these strategies.




This article was authored by Chris Gullotti and Jeffrey Briskin. Chris is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.


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