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2020 has been a year of uncertainty, stress, and confusion for everyone. The coronavirus swept across the globe with far-reaching consequences. Lives were upended, health was compromised, jobs were lost, businesses shut down…the list, as we all know, goes on. As the unemployment rate reached staggering heights, a handful of stimulus bills were issued to those in need; with this relief, of course, comes new tax forms.
If you're guiding your clients through tax planning this season, there's a good chance you'll run into Form 8915-E. The new 8915-E Form, which was made possible by the CARES Act, will report the 2020 qualified disaster distributions and record any portion of the distributions that have been repaid.
The CARES Act was orchestrated to provide a $2.2 trillion economic stimulus bill in response to the economic hardships resulting from the global coronavirus pandemic in the United States. To be qualified as a disaster distribution, the distribution must be a coronavirus-related distribution that occurred in 2020 before the deadline of December 31, 2020, and the distribution was made to a qualified individual. In the case of claiming the qualified disaster distributions made from an individual’s requirement plan on the 2020 8915-E form, we must fulfill the criteria given by the CARES Act before making any qualified disaster distributions. The Treasury Department and the IRS have not provided any guidance of the Section 2202 of the CARES Act; however, it was stated that individuals who wish to fill the qualified disaster distributions from their requirement may follow the instruction found in the Notice 2005-92 until further notice.
Background on the 8915-E Form
The 8915-E form is a Qualified Disaster Retirement Plan Distributions and Repayments that is used for the 2020 coronavirus-related distributions. Congress recently decided to adjourn until post-election, stopping the distribution of any more coronavirus-related relief packages. As the coronavirus continues to devastate our nation, the IRA has provided coronavirus-related distributions that are eligible for special tax benefits on the 8915-E Form for those who are affected by the 2020 coronavirus.
Form 8915-E is designed for those who are affected by a qualified 2020 disaster. Individuals will receive a distribution under the Qualified 2020 Disaster Distribution Requirements and will be qualified for favorable tax treatment. When viewing the form, part I is to determine an individual’s total distributions from all retirement plans, including any IRAs and any distribution outside of the qualified 2020 disaster distributions. Part II and III of the form is to report an individual’s qualified 2020 disaster distributions, to specify any repayments from the distributions, and to calculate the taxable amount (IRS).
Who must file and when & where to file? Those who have received a qualified 2020 disaster distribution from an eligible retirement plan and other 2020 distributions made before December 31st are eligible to file 8915-E Form. The 2020 8915-E Form is to be filled with an individual’s 2020 form 1040, 1040-SR, or the 1040-NR. The completed 8915-E Form is required to be sent to the IRS at the same time and place as filing for form 1040, 1040-SR, or the 1040-NR. Additionally, the form will also be filed in 2021 and 2022 to report the 1/3 taxable portions of the 2020 distributions net of any repayments of the 2020 distributions.
The coronavirus is the only qualified 2020 disaster. As of 2020, the coronavirus is the only qualified disaster reportable on the 8915-E form according to the Qualified 2020 Disaster Distribution Requirements.
What are the qualified 2020 disaster distribution requirements? To be qualified for the disaster distribution, the distribution must be a coronavirus-related distribution that is filed in 2020 before the deadline of December 31, 2020, and the distribution was made to an individual meeting any of the following criteria:
- An individual has tested positive for SARS-CoV-2 or for coronavirus.
- An individual’s spouse or dependent has tested positive for coronavirus.
- A member of your household experienced financial consequences as a result of having work hours reduced, being quarantined, being furloughed, or laid off as a result of the coronavirus.
How is a qualified 2020 disaster distribution taxed? A qualified disaster distribution is usually included in an individual’s income in equal amounts over three years (IRS). If more than one distribution was made in 2020, then you must treat all distributions filed this year the same way. If you made repayment before you could file your return, it would reduce the amount of the distribution included in your income.
Retirement Changes Found in the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act was enacted on March 27, 2020, to provide fast and direct economic relief to the American people. The $2.2 trillion economic stimulus bill was signed into law as an attempt to combat the economic fallout created by the coronavirus. The 1,000+ page CARES Act is filled with the details surrounding the funding, loans, and tax provisions put in place to try and help out all Americans, no matter their line of work. Section 2202 of the CARES Act specifically covers special rules for use of retirement funds to cover financial-related challenges incurred by the coronavirus pandemic. The CARES Act impacted five main areas of retirement planning: required minimum distributions, 401(k) loans, Social Security benefits, the new coronavirus-related distribution exception, and charitable giving, which in turn will affect retiree’s retirement income strategies.
A few months ago, the IRS published a list of frequently asked questions on coronavirus-related distributions made from eligible retirement plans and IRAs. Eligible retirement plans are certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs. The FAQs answered questions from what a coronavirus distribution is to what the tax implications of the distributions are. Some key information to be aware of from the answered questions and the CARES Act as a whole are listed below:
- Coronavirus-related withdrawals made from eligible retirement plans, including IRAs which normally do not allow plan loans, of amounts up to $100,000 are not subject to the 10% additional tax previously incurred due to early withdrawals. For example, pulling money out before age 59 ½.
- Qualified individuals have the opportunity to borrow more money from their eligible retirement plans than normal and have more time to pay it back. However, be aware that coronavirus-related distribution from 401(k) loans can only be either $100,000 or 100% of the individual’s vested account balance, whichever is less, for a taxable year. The $100,000 limit is per person. Therefore, if you are filing married filing jointly, and both of you took coronavirus distributions, you should each file form 8915-E to report the distributions.
- Distributions have the option to be reported and taxed across 2020, 2021, and 2022 or include the full distribution amount to be taxed in 2020 alone. It is important to also note that state and local income tax may not have the same delayed tax guidelines. For example, if you receive a $9,000 coronavirus-related distribution in 2020, you could report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022.
- You may choose to repay all or a partial amount of the coronavirus-related distribution within three years from the date of the first received distribution. If refunding a previously taxed distribution, you must file an amended 2020 and/or 2021 tax return. Repaid distributions will be considered tax-free rollovers.
- The repayment of loans from eligible retirement plans, not including IRAs, may be delayed for up to one year; although interest will still be accruing throughout the delay.
- Employers may or may not update their retirement plan guidelines to reflect the CARES Act, but employees still have the ability to take a distribution that meets the coronavirus-related distribution requirements on their personal federal income tax return as a coronavirus-related distribution.
- Qualified individuals will use a Form 8915-E to record any coronavirus-related distribution repayments and to determine the amount of distributions that should be included in the year’s tax return. Form 1040 should be used to designate distributions from retirement plans when filing federal income tax returns.
- Eligible retirement plans must report the payment of any coronavirus-related distributions on Form 1099-R, even if the individual repaid the distribution that year.
- Included in the CARES Act, all 2020 required minimum distributions are waived whether or not you meet the criteria to be considered a qualified individual for coronavirus-related distributions for two years. This allows for retirees to leave the retirement accounts untouched for a few years, while their value hopefully increases as the account recovers from possible effects of the economic downturn.
- Section 2302 of the CARES Act allows for self-employed individuals and employers to delay payment of the employer-side Social Security taxes on employee wages between March 27 - December 31, 2020. Payment can be pushed off until 50% of payment is due on December 31, 2021 and the second half is due December 31, 2022.
- Qualified charitable distributions of up to $100,000 from an IRA are still available for 2020, but with no required RMDs the distribution would not be offset by any RMDs. The CARES Act has allowed charitable contributions of cash to amount up to 100% of adjusted gross income instead of the usual 60%.
2020 Disaster Retirement Plan Distributions and Repayments
Before we begin discussing filing qualified disaster distributions made from your retirement plan on 2020 Form 8915-E, we must alert you to the note within the form by the IRS that states:
“Before you begin:
- Complete 2020 Form 8915-D, Qualified 2019 Disaster Retirement Plan Distributions and Repayments, and 2020 Form 8915-C, Qualified 2018 Disaster Retirement Plan Distributions and Repayments, if applicable.
- If you completed Part I of 2020 Form 8915-D, or of 2020 Form 8915-C, see the Caution in Column (a) in the instructions to figure the amounts for column (a).”
Background. In order to consider who and what needs to be filed to the IRS for 2020 regarding the use of retirement funds, we must consider the background on Section 2202 of the CARES Act. As of November 12, 2020, the Treasury Department and the IRS have not issued guidance on Section 2202 of the CARES Act, but they have stated in their questions and answers about coronavirus-related relief for retirement plans and IRAs that “The Treasury Department and the IRS anticipate that the guidance on the CARES Act will apply the principles of the Notice 2005-92 to the extent the provisions of section 2202 of the CARES Act are substantially similar to the provisions of KETRA that are addressed in that notice”. With this information, we may review Notice 2005-92 and follow the instructions until further notice.
KETRA. In the Katrina Emergency Tax Relief Act of 2005 (KETRA), Notice 2005-92, Section 4: Guidance For Individuals Receiving Katrina Distributions under Section 101 of KETRA, Subsection E, “A qualified individual is permitted to include a Katrina distribution ratably over a 3-year period and the individual contributes any portion of the Katrina distribution to an eligible retirement plan at any date before the timely filing of the individual’s tax return, the amount of the recontribution will reduce the ratable portion of the Katrina distribution that is includible in gross income for the tax year of the filed return.”
CARES Act. In the CARES Act, Section 2202: Special Rules for Use of Retirement Funds, Subsection A, “Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), of the Internal Revenue Code of 1986, as the case may be.”
Prior Year Disaster Distribution Relief. After reviewing authoritative sources regarding ratability of distributions over 3-years, in preparation for 2020 tax returns, the IRS requires those who received qualified disaster distributions before June 17th, 2020, to look back retroactively to figure out if they qualified for relief concerning years 2018 and 2019 due to the 3-year ratability window for 2018, coming to a close in 2020 and the end of the 2nd year of the 3-year window for 2019. Similar to how distributions received from 2020 until 2022 may qualify as a distribution for the coronavirus disaster.
In addition to this requirement, the IRS also states that taxpayers must file 2020 Form 8915-C and 2020 Form 8915-D if the taxpayer has:
2020 Form 8915-C
- You received a qualified 2018 disaster distribution in 2018 or 2019 that you are including in income in equal amounts over 3 years.
- You made a repayment of a qualified 2018 disaster distribution in 2020.
2020 Form 8915-D
- You received a qualified 2019 disaster distribution in 2019 that you are including in income in equal amounts over 3 years.
- You made a repayment of a qualified 2019 disaster distribution in 2020.
Why is this important. The importance of this calculation is to properly allocate the amount that should be inputted into your 2020 Form 8915-E if you received qualifying distributions this year. The example the IRS uses highlights how distributions made in 2020 should be distributed accordingly.
*the example below is provided by the IRS
Arnell suffered economic losses as a result of Texas Severe Storms And Flooding in 2018 and Tropical Storm Imelda in 2019. His main home was in Texas during the disaster period for each disaster. These events were qualified 2018 and 2019 disasters, respectively. Arnell also experienced adverse financial consequences as a result of being laid off due to coronavirus.
In 2020, he received a traditional IRA distribution of $140,000 and another traditional IRA distribution of $110,000 for a total of $250,000 in distributions. The distributions were made on May 26 and June 4, respectively. He received no other distributions in 2018, 2019, or 2020. He is completing 2020 Form 8915- C, 2020 Form 8915-D, and 2020 Form 8915-E. He must complete his Form 8915-C first.
He reports $100,000 from the May distribution as a qualified 2018 disaster distribution on Form 8915-C. He reports the remaining $40,000 from the May distribution and $60,000 of the June distribution for a total of $100,000 in qualified 2019 disaster distributions on Form 8915-D. He reports the remaining $50,000 from the June distribution as available distributions under column (a) in the Form 8915-E portion of his Filled-in Worksheet 1 for Example 1. On lines 1 through 3 of column (a) in Part I of his 2020 Form 8915-E, Arnell enters the amounts shown in column (a), lines 1 through 3, of Form 8915-E on his Filled-in Worksheet 1 for Example 1.
Total Available Distributions in 2020
- $140,000 May 26
- $110,000 June 4
2020 Form 8915-C
- Qualified 2018 Disaster Distributions = $100,000
Total Available Distributions in 2020 after Form 8915-C
- $40,000 May 26
- $110,000 June 4
2020 Form 8915-D
- Qualified 2019 Disaster Distributions = $100,000
Total Available Distributions in 2020 after Form 8915-C and Form 8915-D
As the new year approaches and the uncertainties that come with it surface, due diligence must be done to minimize the risk of misstatements. With the 2020 tax return season just around the corner, taxpayers (and their financial planners, aka YOU!) should be aware of the necessary actions they must take as additional requirements are drafted and finalized by the Treasury Department and the Internal Revenue Service.
For more information about the 2020 Form 8915-E, please visit: https://www.irs.gov/pub/irs-dft/i8915e--dft.pdf