Personal Tax Planning - Notable Changes

COVID-RELATED WITHDRAWAL

Withdrawals of up to $100,000 from IRA and workplace retirement accounts were permitted until December 31, 2020. The funds could be used to cover COVID-related expenses, including treatment for you, your spouse, or dependent(s). You could also use the funds to offset income lost due to quarantine, job loss or a reduction of hours. The amount withdrawn is taxed as ordinary income. You have the option of including this in your 2020 income or spreading it out equally over 2020, 2021 and 2022. However, you can avoid paying tax on it if you repay it within three years. Additionally, if you tapped your workplace retirement plan, your plan may delay repayment for up to one year.

IRA CONTRIBUTIONS ALLOWED AT ANY AGE

Congress revoked the age limit for making IRA contributions, which was 70-1/2. Now you can continue contributing to an IRA as long as you have earned income.

RMD STARTS AT AGE 72

The age at which taxpayers must begin taking required distributions has been increased from 70-1/2 to 72. However, taxpayers born before June 30th, 1949 must still use age 70-1/2 as the RMD age – and begin taking RMDs no later than April 1st of the year after the year in which they turn 70-1/2.

PENALTY-FREE WITHDRAWALS FOR NEW PARENTS

New parents may qualify for an exception to the 10% penalty that normally applies to early distributions (prior to age 59.) from IRA or 401(k) accounts. You can take the withdrawal following a qualified birth or adoption of a new child, provided you do so within a year of birth or adoption. The withdrawal is limited to $5,000 per parent, per eligible retirement account. You also have the option to repay at a later date although it isn’t required.

PART-TIME EMPLOYEES MAY PARTICIPATE IN 401(k)

Part-time workers may contribute to their employer’s 401(k) plan once they have worked 500 hours or more for three consecutive 12-month periods after January 1, 2021. Employers are not required to match contributions.

INHERITED IRAS

Effective in 2020, non-eligible designated beneficiaries of IRAs must withdraw the inherited accounts within ten years. There are no annual required minimum distributions – except the last one. This does not apply to the decedent’s spouse, minor children, beneficiaries who are disabled or have chronic illnesses, beneficiaries not more than 10 years younger than the decedent, and See-through Trusts.

The Ten-Year Rule also applies to trusts that receive IRA assets on behalf of beneficiaries. If a conduit trust is established to help protect assets, it still must forward all the IRA income to beneficiaries. This would potentially expose the inherited IRA assets to heirs’ creditors and any bankruptcy or divorce proceedings – defeating the purpose of an asset protection trust. In some circumstances, you may wish to have an attorney redraft any existing conduit trusts to allow the trust to retain the assets, rather than distributing income to beneficiaries. The downside is that these assets would then be subject to less favorable trust tax rates. If you have significant assets in retirement accounts that you are planning to pass on to non-spousal beneficiaries, it is a good idea to review your estate plan documents.

FARMERS IN DROUGHT AREAS

Farmers living in affected drought areas who were forced to sell certain livestock between 2015 and 2020 have an additional year to replace them and defer any gains on the forced sale. Usually you have four years to replace livestock from a forced sale. This change will affect those living in counties designated as having exceptional, extreme, or severe drought conditions. currently, portions of 50 states and territories qualify and only livestock used for draft, dairy, or breeding purposes are eligible. Poultry and livestock raised for slaughter or sport don’t qualify.

ABLE ACCOUNTS

Achieving a Better Life Experience (ABLE) accounts are designed to help people with disabilities save and pay for disability-related expenses. Now through 2025, eligible individuals can roll over money from a qualified 529 plan into their ABLE account. And certain contributions made by low and moderate income workers may qualify for the Saver’s Credit which could be as much as 50% of your contribution.