ISSUE 142, Special Section: Cancer Care

Know A Good Doctor? We Do.

Scott Neal

Scott Neal, CPA, CFP, is the president of D. Scott Neal, Inc., a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Reach him at scott@dsneal.com or by calling 1.800.344.9098.

New Tax Rules and Planning Opportunities Under CARES

Before talking about taxes and money, let me first say thank you to all of you who are meeting the medical needs of patients during this pandemic.

The Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law on Friday March 27, 2020. This act, combined with the SECURE Act, which became law on December 20, 2019, offers some unique planning opportunities, some of which are only effective for this year.

CARES cleared up some earlier confusion related to tax filing deadlines. Tax filing and payments for returns originally due on April 15th, and the estimated taxes due on June 15th, have been postponed to July 15th. You do not have to be sick or quarantined to take advantage of this postponement. If you owe taxes, the period from April 15th to July 15th will be disregarded for calculating interest and penalties. However, interest and penalties will begin to accrue on July 16th if you owe money and haven’t paid by then. You can still extend filing your tax return to October 15th by filing an appropriate extension on or before July 15th. The 2019 IRA contribution deadline is also postponed to July 15th. You still have time.

These new laws will impact your financial future and they indicate a need to re-cast your financial plan. As you ponder the new rules, it’s important to remember that required minimum distributions (RMDs) from traditional retirement accounts are taxed to the recipient. Distributions from ROTH IRAs are not taxed. We have found that RMDs, coupled with taxable social security, push many people into a higher tax bracket.

Many of you created your financial plan, and established your beneficiary designations, intending the retirement account distributions to be taken ratably throughout the lifetimes of your beneficiaries. Under old law, younger beneficiaries could extend the payout, and tax payments, of the IRA over many years, even decades. However, the SECURE Act changes what happens post-mortem. The so-called “stretch IRA” is gone. It has been replaced by the 10-year rule.

“These new laws will impact your financial future and they indicate a need to re-cast your financial plan.” — Scott Neal

Essentially, the 10-year rule says that retirement accounts that are inherited by anyone, other than a select group of beneficiaries, must be distributed over the 10 years following the owner’s death. There are exceptions to the 10-year rule for 1) a surviving spouse, 2) a child who has not reached the age of majority, 3) a disabled or chronically ill person or 4) a person not more than ten years younger than the retirement account owner. Unfortunately, the 10-year rule also applies to a ROTH. This is a significant shift. There is a potential trap lurking here for a married person who simply leaves his or her IRA to a surviving spouse. When that spouse dies, the balance is then subject to the 10-year rule and may be handed to children or grandchildren in their highest earning years (i.e., highest tax bracket years). One might consider splitting the beneficiary designations between spouse and children. The need to model alternative scenarios in order to understand the impact of beneficiary decisions is crucial.

An important provision of CARES provides a temporary waiver of RMDs from retirement plans for 2020. That’s right, no RMDs for 2020. If you have taken the required distribution already, consider using the 60-day rollover rule to get it back into the IRA to avoid taxes for 2020. Converting an IRA to a ROTH is often avoided because taxes must be paid on the conversion. Since RMDs have been waived and the taxes therefore avoided, this could be the year to re-consider and make the conversion.

For those who are under 59½ and are struggling due to the impact of the coronavirus, penalty-free early distributions up to $100,000 can be taken from retirement plans. There are stiff requirements that must be met if you are to qualify for exemption of the penalty for early withdrawal. Tread carefully.

Loans from retirement plans are rarely a good idea. But if you need cash to make it through the pandemic, retirement plan loan limits have been increased from $50,000 to $100,000 and can be 100% of the balance, rather than just 50%, the prior limit. This is a temporary provision that will go away later this year.

Thanks to the pandemic, charities need our help now more than ever. To address this need, under CARES Congress modified the charitable contribution deduction. First, it provides a deduction from Adjusted Gross Income for those who do not itemize. The limit on that deduction is $300. For those who do itemize, percentage limitations on charitable contributions have been eliminated. The prior limit for cash contributions was 60% of AGI, now it’s up to 100%. You cannot use a donor-advised fund or appreciated stocks for this contribution, but it could still make sense for a lot of charitably inclined folks. Consider pairing a ROTH conversion with a charitable gift deduction sometime in 2020. Taxes on the conversion can be eliminated by the contribution deduction. Once again, tread carefully. Check with your tax preparer. Reach out to us if you have questions. We are here to help.

Scott Neal, CPA, CFP® is president of D. Scott Neal, Inc. a fee-only financial advisory firm with offices in Lexington and Louisville. For more write him at scott@dsneal.com