Market Update, Tax Planning

The Pandemic Isn’t Over, but Most COVID-19 Tax Relief Is – At Least For Now

January 20, 2021

The Pandemic Isn’t Over, but Most COVID-19 Tax Relief Is – At Least For Now

Though vaccines have been approved and are being distributed, the pandemic seems far from over. Businesses remain closed or restricted, social distancing and stay-at-home mandates are still in place, and the numbers continue to rise into 2021.

Legislation signed into law on New Year’s Eve included some COVID-19 related provisions. But despite the fact that the pandemic is not over, most of the pandemic-related tax provisions that benefited our clients last year have ended. For example:

• RMDs must be taken in 2021; the waiver was for 2020 only.

o The new RMD rules – for individuals born on and after 7/1/1949 – are now in effect.
o Luckily, we treat 2020 as if it didn’t exist for RMD purposes in 2021.
o You do not have to “double up” on your distributions, and 2020 does not count against the 10-year distribution period.

• Income taxes must be paid on the regular schedule; the extensions were for 2020 only.

• COVID-19 related distributions cannot be taken from your retirement plan this year; the special rules were for 2020 only.

o However, you still can benefit from tax relief on those distributions.
o The distributions are taxable, but you can split the tax into three installments.
o You do not have to pay the 10% additional tax.
o You can put some or all the money back into your retirement plan any time within the next three years.
o Please note: these provisions were optional, and only apply if the employer/sponsor adopted them for 2020.

The most recent legislation did include two new or extended non-COVID-19 tax benefits that could benefit our clients, however:

• Enhanced deductions for cash charitable contributions.

o In response to the pandemic, the limit on cash charitable contributions to a public charity was waived for individuals who itemize deductions. (The usual limit is 60% of Adjusted Gross Income (AGI).) The new legislation extends that waiver through 2021.
o In 2020, non-itemizers could claim a write-off of up to $300 (total, for single or married filing jointly) of cash gifts to public charities. For 2021, the tax break is extended and expanded to $600 for married filing jointly.

• Eliminate the 10% threshold for deducting medical expenses.
o The threshold for deducting medical expenses was scheduled to jump up to 10% of AGI for 2021 forward.
o The new legislation made the current threshold (7.5%) permanent.

Of course, the pandemic-related relief we saw last year – or new and different relief – could be passed after the inauguration of a new Administration. While the actual legislation for President Elect Biden’s “American Rescue Plan” has yet to be written, it appears that it will not include any noteworthy IRA or retirement plan provisions. We will be monitoring the situation closely and update you with developments as they occur. In the meantime, if you have questions, please feel free to reach out to your relationship manager.

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