By Julie Dale, CPA-Austin
The IRS issued Notice 2020-50 to provide further guidance on the coronavirus-related retirement plan distribution and loan provisions included in the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. The CARES Act provided for relaxed requirements for both receiving these distributions and the taxation or rollover of the distributions.
A coronavirus-related retirement plan distribution is limited to $100,000 and is available to a taxpayer who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19, or who experiences adverse financial consequences as a result of coronavirus-related reduced compensation, lack of childcare or business interruption. These retirement distributions are not subject to the 10% penalty and the income can be recognized over three years instead of a single year. The distribution can also be repaid during the three-year time frame to receive tax-free rollover treatment.
The notice includes detailed guidelines on how these distributions will be taxed if the taxpayer chooses to roll over a portion or all the distribution in the allotted time frame and provides examples. A taxpayer has until the extended deadline for the return to roll over funds to claim it on the original tax return. For example, if a taxpayer takes a $30,000 distribution in 2020 and chooses to recognize the income over three years, then the taxpayer has until Oct. 15, 2021, to roll over $10,000 to eliminate the income recognition for 2020 assuming an extension is filed. If the taxpayer reports the income and later recontributes the funds, then an amended return is required.
For those spreading the income over three years, the IRS has chosen to treat rollover contributions as coming from the most recently reported income first and then rolling back to past income recognized. For example, if a taxpayer takes a $60,000 distribution in 2020 and contributes $30,000 on April 15, 2022, then the $30,000 recontribution first offsets the 2021 income to be reported of $20,000 and the 2020 tax return would need to be amended to reflect the remaining recontribution of $10,000. To avoid amending a previous return, the taxpayer can choose to carry forward the additional recontribution of $10,000 to the year 2022.
If the taxpayer rolls over one-third of the original distribution amount by the tax deadline for each of the three years, then there is potentially no need to amend tax returns to claim refunds. For example, if a taxpayer takes out a $90,000 coronavirus-related retirement distribution in 2020 and recontributes $30,000 on each of the tax return deadlines (April 15, 2021; April 15, 2022; and April 15, 2023), then the income from the $90,000 distribution can be excluded from the tax returns for the years 2020, 2021 and 2022.