As the end of 2020 approaches, individual taxpayers should be aware of two tax saving provisions within the CARES (Coronavirus Aid, Relief, and Economic Security) Act that was passed earlier in March.
Table of Contents
Early Withdrawals from Retirement Plans
Early Withdrawals from Retirement Plans
Generally, taxpayers under age 59½ are subject to a 10% penalty on retirement plan withdrawals. Under the CARES Act, eligible taxpayers can withdraw up to $100,000 from their retirement plan without incurring an early distribution penalty. This provision could be an ideal option for those taxpayers who need support to mitigate the financial impact of the coronavirus.
Eligible taxpayers must meet one of the following conditions:
- The taxpayer has been diagnosed with coronavirus
- The taxpayer’s spouse, child, or dependent has been diagnosed with coronavirus
- The taxpayer has experienced adverse financial hardship due to the coronavirus
The distribution is still subject to income taxes. However, the CARES Act allows eligible taxpayers to ratably allocate the amount over a three-year period.
Example:
A taxpayer under age 59½ takes an early $100,000 distribution from his retirement plan to alleviate the financial hardships of coronavirus. Since the taxpayer meets condition 3, the amount will not be subject to a 10% penalty.
The eligible taxpayer will include $33,333 in gross income for the 2020, 2021, and 2022 tax years.
Charitable Contributions
2020 is the year for taxpayers who are thinking about making charitable contributions.
Normally, taxpayers who take the standard deduction cannot deduct charitable contributions. However, under the CARES Act, taxpayers who claim the standard deduction can deduct up to $300 of cash contributions to charities from their income.
The CARES Act also increases the charitable deduction limitation percentage for taxpayers who itemize deductions. The limitation is increased from 60% to 100% of adjusted gross income for cash contributions. This means that taxpayers who make large charitable donations could effectively pay zero in income taxes for the year. Generous wealthy taxpayers should consider donating in 2020 to take advantage of this one-time increased limitation percentage.