With Rocky Mengle, Author and Tax Editor for Kiplinger
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This week, Steve spoke with Rocky Mengle, author and tax editor for Kiplinger Personal Finance, about the numerous tax changes stemming from the coronavirus pandemic of 2020. These changes are mostly specific to 2020 and can help you out a lot financially.
Due Dates For Taxes
One of the most important things for tax filers to understand is that the due dates for filing federal taxes have changed. Rocky explained, “Any federal tax due date previously scheduled from April 1st to July 14th has been extended to July 15th. This covers, of course, your income tax and your 1040. It also covers estimated tax payments that would have been due April 15th or June 15th.” Additionally, gift and self-employment taxes, as well as IRA and health savings account contributions for 2019, can be made up until July 15th.
But, let’s say that you’ve already submitted your taxes for 2019. It’s not too late to make a contribution to your IRA, but you will have to file an amended tax return in order to get the credit for the deduction. Rocky added, “And be sure that you tell your IRA custodian that you want that applied to 2019.”
The government’s stimulus checks are designed to help ease the burden many families are feeling in the midst of growing unemployment rates. But what do those checks mean in terms of how you file your taxes? Steve asked Rocky to explain it.
“The money you receive in your stimulus check isn’t taxable; you’re not going to be bumped into a higher tax bracket. In fact, there’s a chance that you might even get a slightly higher tax credit for 2020 because it kind of mirrors the stimulus check calculation. But if your stimulus check isn’t as much as your 2020 tax credit, you’ll get the difference back when you file your return,” Rocky said.
Charitable Donations And Student Loan Payments
With all the craziness and hardship that 2020 has brought, there is some good news in terms of charitable donations and for people who are employed by a company that helps pay off student loans.
Rocky informed listeners, “There’s a new above-the-line tax deduction in terms of charitable donations and you don’t have to itemize. It’s for up to $300 worth of cash donations. This only applies to 2020. On top of that, for people who do itemize, the cap on Schedule A cash donations has been removed. That means you can donate and deduct up to 100% of your adjusted gross income on Schedule A itemized deductions for your 2020 return.” Steve added that this is excellent news for charities that were worried about a drop in donations this year.
The good news doesn’t stop there. Rocky noted that “If you’re lucky enough to have an employer that will pay off some of your student loan, that amount will not be taxable income to you, the worker. It’s capped at $5,250.”
2020 Changes For Retirees
There are some changes this year for retirees as well. Retirees age 72 and over normally have to take required minimum distributions (RMDs) from their retirement accounts. However, the government passed an RMD Waiver for 2020. Rocky said, “You get a break from that this year. For 2020, you don’t have to take any RMDs if you don’t need the money.”
There’s also a great change if you need to take a loan from your 401(k). “There’s usually a cap on how much you can take,” Rocky said. “Instead of only being able to take 50% of the account balance, up until September 23rd of this year, you can take out the full balance.”
And penalties for early withdrawals from retirement accounts have also been relaxed for 2020. The 10% penalty for early withdrawals on retirement accounts is being waived for up to $100,000 of coronavirus-related expenses. Rocky explained, “Normally if you’re not at least 59 ½ years old, then you get hit with the 10% penalty. But not if your withdrawal is $100,000 or less and being used for payments related to issues with COVID-19. These funds can be repaid within three years and it’s just treated as a regular rollover,” Rocky shared.
You can learn more from Rocky and read his articles here at Kiplinger.com.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Steve Pomeranz: My next guest is Rocky Mengle. He is the tax editor for Kiplinger and joins me today to discuss the confusing state of 2020 taxes. Rocky, welcome to the program.
Rocky Mengle: Hi, Steve. Thanks.
Steve Pomeranz: You know, with so much going on, from the issuance of stimulus checks to the implementing of the 2019 tax law, it’s hard to know where to start, but I was thinking maybe we should just start on the due dates. Let’s see what has changed with regards to when stuff is due.
Rocky Mengle: Yeah. A lot of changes there. Everybody thinks that April 15th is tax day, but for 2020 that’s one of the many changes that we’re seeing. So basically, any federal tax due date that was from April 1st to July 14th this year is now extended to July 15th. So that covers, of course, your income tax return, your 1040. It also covers estimated tax payments that would have been due April 15th or June 15th, they’re now, those first two payments, are not due until July 15th. Self-employment taxes, gift taxes, also, IRA contributions for 2019 or contributions to a health savings account for 2019, they were pushed back from April 15th to July 15th as well. So everybody gets an extra three months, basically, to not worry about taxes.
Steve Pomeranz: So my question is what if you already filed your 2019 and you want to make an IRA contribution. Is it too late?
Rocky Mengle: No, it’s not too late. No. You can still do that. Just make sure that you tell your IRA custodian that you want that applied to 2019.
Steve Pomeranz: Okay. Very good. All right. And, but actually, you’ll have to file an amended return in order to get the credit for the deduction?
Rocky Mengle: Yeah. If you’re taking the deduction, yeah. For the IRA, you would have to file an amended return. That’s a good point. Thanks.
Steve Pomeranz: Sure. Okay. Let’s talk about all these rebates that the stimulus checks… Well, they’re not rebates, even though the government thinks of them that way. Let’s call them stimulus checks or the $1,200.00 and so on. How is that being considered?
Rocky Mengle: In terms of taxes?
Steve Pomeranz: Yes.
Rocky Mengle: Well, it’s not taxable income. That’s one good thing. So you’re not going to be bumped up into a high tax bracket or anything like that from the payments. You might even get a little bit more when you file your 2020 return next year because there’s a tax credit for 2020 and it kind of mirrors, in terms of calculation, the stimulus check calculation. But if for whatever reason your stimulus check isn’t as much as your 2020 tax credit, then you’ll get the difference back when you file your return. And sometimes because the stimulus checks, they’re based on either your 2018 or 2019 return in most cases and you can have a change of circumstances, make more or less money or have a child or something like that, that makes a difference in how the stimulus check and the tax credit are calculated. So again, you’re kind of reconciling that when you do your taxes next year and you might get a little bit more back.
Steve Pomeranz: Well, you know, I was talking to somebody who changed businesses in 2018 and really didn’t earn anything for 2018, but he makes a very good living otherwise, and he received a stimulus check, which really surprised me because I wouldn’t think someone in his level of income would receive it, but 2018 was an unusual year. So now when it comes down to reconciling with the 2020, what is going to happen to him?
Rocky Mengle: Yeah. I mean, he’s going to be able to keep that money. The IRS is not going to try to take back any of that money if your stimulus payment is more than what your 2020 credit amount would be. So you get to keep that.
Steve Pomeranz: Okay. All right. Let’s talk about donations to charity because there have been some changes with that.
Rocky Mengle: Yeah. First of all, there’s a new above the line tax deduction. So you don’t have to itemize in order to claim this. And actually, if you do itemize, you can’t claim it. So it’s for up to $300.00 of cash donations. It has to be cash to a charity. So that’ll be on your 2020 return. It’s only for 2020. It doesn’t carry over into any other year. And then for people who do itemize, normally there’s a cap on the amount of cash donations that you can take as a deduction on your Schedule A and it’s capped at 60% of your adjusted gross income. Well, they’re doing away with that cap for 2020. So now you can donate and deduct up to 100% of your AGI on Schedule A itemized deductions for 2020. And again, that’s just for 2020.
Steve Pomeranz: Well, that’s good news for charities. I can tell you that.
Rocky Mengle: Yes.
Steve Pomeranz: Because I know one concern they’ve had is the loss of charitable giving because of the reduction in the benefit for the tax benefit. So that’ll be good news for them.
Rocky Mengle: Yes.
Steve Pomeranz: What about student loan payments by employers? That was a category I really never thought of until I read your article?
Rocky Mengle: Yeah. If you’re lucky enough to have an employer that will pay off some of your student loans, never happened to me, but it happens for some people. That amount will not be taxable income to you, the worker. It is capped at a little over $5,000.00, $5,250.00. So if that’s a perk that’s available through your workplace, then that’s great. They can pay off that much of your student loan and it won’t affect your taxes. Your taxes won’t go up.
Steve Pomeranz: There were some changes with retirees taking their required minimum deductions, otherwise known as the RMD, something called an RMD Waiver. What is that?
Rocky Mengle: Well, basically for 2020, you don’t have to take out money from your IRA or 401K if you don’t want to. Now, those RMDs typically kick in now, after it changed in the law last year when you turn age 72. But again, you get a break from having to do that in 2020. And a lot of people take those distributions anyway because they need the money, but for people who have other sources of income in retirement, that’s always kind of a sore point having to take out that money when they really don’t want to. And so they don’t have to in 2020.
Steve Pomeranz: Okay. And for those who need money from their 401Ks, there’s a very good change in the law right now to enable them to take more as a loan from their 401K.
Rocky Mengle: Right. Normally, there’s restrictions on how much you can take. It’s usually up to $50,000.00 or 50% of the account balance and those figures have been moved up to $100,000.00 or 100% of your account balance. You can take it all out if you want, but that’s up to September 23rd of this year. So again, you can just borrow more from your 401K than you could in previous years.
Steve Pomeranz: That’s going to be an important feature for somebody.
Rocky Mengle: Yeah.
Steve Pomeranz: And finally, the penalty for early withdrawal on your IRA has been changed. How is that?
Rocky Mengle: Yeah. The 10% penalty is waived for up to $100,000.00 of coronavirus related payouts. So normally, you pay that 10% penalty if you take out money from a retirement account if you’re not 59 and a-half-years of age yet. Also, those funds can be repaid within three years and it’s just treated as a regular rollover. So you wouldn’t be taxed on that. And if you don’t do that, then the taxes on the distribution will be spread out over three years. So there’s some good tax breaks there.
Steve Pomeranz: Yes. Some interesting information from my guest, Rocky Mengle, Tax Editor of Kiplinger Magazine. And he can be found online as well, just type in his last name, M-E-N-G-L-E, and you’ll see all of his articles related to tax issues. Rocky, thank you so much for joining me.
Rocky Mengle: You’re welcome. My pleasure.