We all know the adverse financial impact of the pandemic on many Americans. Congress has enacted several laws designed to help bridge the financial gap. One of these laws may allow you to reduce your tax burden for 2020 and replenish your retirement account if you qualify.

The CARES Act, passed last Spring, allows coronavirus-related distributions from retirement accounts, and new guidance has expanded who qualifies for this relief. There are also repayment provisions in the Act if you want to recontribute the funds.

Generally, the law gives coronavirus-related distributions two tax benefits. First, you can withdraw and keep the money, avoid the normal 10% early-withdrawal penalty, and spread the tax equally over three tax years (2020, 2021 and 2022). Second, you can repay the money within three years of distribution and pay no tax or penalty on the withdrawal.

This relief is only available if you were affected by coronavirus as defined in the law. I can’t give you all the provisions here, but most folks should qualify. If you have a question about whether you qualify, please call or email our office. Also, only up to $100,000 per person will qualify, and you had to have taken the distribution in calendar-year 2020.

If you meet the qualification and choose to repay all or part of the distribution, you have a few options. If you take the distribution and repay it in full before you file your 2020 tax return, you don’t include any of the income on your return and you pay no tax or penalty.

If you don’t think you’ll repay the distribution, you can elect to report the full distribution on your 2020 tax return and pay tax but no penalty on the distribution. If, within three years of the original distribution, you decide to repay your retirement account in full, you would amend your 2020 tax return, remove the income you reported on the distribution and claim a refund of the tax you paid on that income.

You can elect to report the income over three years. If at any time before three years after the distribution you repay your retirement account, you would amend any returns you’ve filed to report part of the distribution and get a refund of the tax you’ve paid.

You don’t have to repay the full amount. In any of the scenarios above, you can elect to repay part of the distribution. You can amend your return and claim a refund of any income tax you’ve paid on the amount repaid. The bottom line is this law gives you a lot of flexibility to repay some or all of any retirement plan distributions you took last year. Most families will qualify so as your financial condition improves, consider repaying your retirement account, save yourself taxes and boost the amount you’ll have available at retirement.

As always, I am looking for article ideas that you would like me to cover. If you have an idea for a future article, or just have a topic you would like more information on, please send me an email.

At Faw & Associates, we are always available to answer any of your tax or financial planning questions. You can get more information on this or many other topics at our website – or you can contact us directly by calling our office at (336) 838-3080. You can also email me at any time with your question or concern.

We are accepting new clients. Please call our office for an appointment.