Do you remember a tax break in 2020 that allowed you to take (up to) $100,000 from your IRA or your employer retirement plan? These were called “coronavirus-related distributions,” or CRDs in the lingo. In and of itself, the provision was not remarkable. What was remarkable is that one was allowed three years to return some, all, or none of the money to the IRA or employer plan, as one wished.
I was thinking recently that I do not remember seeing
2021 individual returns where someone returned the money.
Granted, we have a flotilla of returns on extension
here at Galactic Command. I may yet see this beast in its natural state.
Let’s go over how this provision works.
To make it easy, let’s say that you took $100,000 from
your 401(k) in 2020 for qualifying COVID-related reasons.
You had an immediate binary decision:
· Report
the entire $100,000 as income in 2020 and pay the taxes immediately.
· Spread
the reporting of the $100 grand over three years – 2020, 2021 and 2022 - and
pay taxes over three years.
There was no early-distribution penalty on this
distribution, which was good.
You might wonder how paying the tax immediately could
be preferable to paying over three years. It could happen. How? Say that you
had a business and it got decimated by COVID lockdowns. Your 2020 income might
be very low – heck, you might even have an overall tax loss. If that were the
case, reporting the income and paying the tax in 2020 might make sense,
especially if you expected your subsequent years’ income to return to normal
levels.
What was a COVID-related reason for a distribution?
The easy ones are:
· You,
a spouse or dependent were diagnosed (and possibly quarantined) with COVID;
· You
had childcare issues because of COVID;
· You
were furloughed, laid-off or had work hours reduced because of COVID.
Makes sense. There is one more:
· You
experienced other “adverse financial consequences” because of COVID.
That last one has an open-gate feel to me. I’ll give
you an example:
· You
own rental cabins in Aspen. No one was renting your cabins in 2020. Did you
experience “adverse financial consequences” triggering this tax provision?
You have – should you choose to do so – three years to
put the money back. The three-year period starts with the date of distribution,
so it does not automatically mean (in fact, it is unlikely to be) December 31st
three years later.
The money doesn’t have to return to the same IRA or
employer plan. Any qualifying IRA or employer plan will work. Makes sense, as
there is a more-than-incidental chance that someone no longer works for the
same employer.
Let’s say that
you decide to return $50 grand of the $100 grand.
The tax reporting depends on how you reported the $100
grand in 2020.
Remember that there were two ways to go:
· Report
all of it in 2020
This is easy.
You reported $100 grand
in 2020.
When you return $50 grand
you … amend 2020 and reduce income by $50 grand.
What if you return $50
grand over two payments – one in 2021 and again in 2022?
Easy: you amend 2020 for
the 2021 and amend 2020 again for the 2022.
Question: can you keep
amending like that – that is, amending an amended?
Answer: you bet.
· Report the $100 grand over three years.
This is not so easy.
The reporting depends on
how much of the $100 grand you have left to report.
Let’s say that you are in
the second year of the three-year spread and repay $30,000 to your IRA or
employer plan.
The test here is: did you
repay the includable amount (or less) for that year?
If yes, just subtract the
repayment from the includable amount and report the difference on that year’s
return.
In our example, the math
would be $33,333 - 30,000 = $3,333. You would report $3,333 for the second year
of the spread.
If no, then it gets ugly.
Let’s revise our example
to say that you repaid $40,000 rather than $30,000.
First step: You would
offset the current-year includable amount entirely. There is nothing to report
the second year, and you still have $6,667 ($40,000 – 33,333) remaining.
You have a decision.
You have a year left on
the three-year spread. You could elect to carryforward the $6,667 to that year.
You would report $26,666 ($33,333 – 6,667) in income for that third and final
year.
You could alternatively
choose to amend a prior year for the $6,667. For example, you already reported
$33,333 in 2020, so you could amend 2020, reduce income by $6,666 and get an
immediate tax refund.
Which is better? Neither
is inherently better, at least to my thinking. It depends on your situation.
There is a specific tax form to use with spreads and repayments
of CRDs. I will spare us the details for this discussion.
There you have it: the ropes to repaying a coronavirus-related
distribution (CRD).
If you reflect, do you see the complexity Congress
added to the tax Code? Multiply this provision by however many times Congress alters
the Code every year, and you can see how we have gotten to the point where an
average person is probably unable to prepare his/her own tax return.
No comments:
Post a Comment