Deep Dive - CARES Act Distributions: Payback, Taxes & Reporting

Please listen to an in-depth discussion of the rules applicable to distributions under the CARES Act including:

CARES Act Distributions (CRD) –
Basics

Qualify:
- Individual or his/her household member is impacted medically or financially by COVID-19 in one of the enumerated ways
Amount: Up to $100k in total from one or more accounts which allows for CRD
Deadline: Distribution must be taken between 1/1/2020 and 12/31/2020
Tax Reporting: Total amount distributed is reported on 1099-R issued in early 2021
Taxes, Withholding & Penalties:
- No 10% penalty
- No Upfront Federal 20% Withholding Required
- Spread Income Taxes over 3 years

Option to Spread Incomes Taxes over 3 years:

Example:
- Jane took a CRD related $90,000 solo 401k distribution on April 15, 2020.
- Jane can include the full $90,000 distribution as earned income for 2020, OR
- Jane can spread the distribution over a three-year period ($30,000 in income for 2020, $30,000 in income for 2021, and $30,000 in income for 2022)

Tax Reporting:

Account Provider reports on Form 1099-R
Taxpayer reports applicable income amount on Form 1040
Taxpayer files Form 8915-E to determine the amount of any CRD included in income for the year, and to report CRD repayments.

Option to Pay back within “3 years and a day”:

Example:

Ted took a $70,000 CRD on 2/20/2020 and received the check on 3/1/2020.
The 3-year payback period starts on 3/2/2020 and Ted may return funds by 3/2/2023.
If funds are fully paid back by 3/2/2023 no taxes are due.

Payback Rules and Considerations:

Pay no taxes if pay back amount due for on or before the tax return due date (see examples)
File amended return(s) to reclaim refund for taxes previously paid (see examples)
Analogous to 60-Day Rollover but not counted towards “once per 12-month” indirect rollover
Partial repayment allowed but can’t overpay
Eligible retirement plan (e.g. CRD from former employer plan and repaid to Solo 401k)
“Like to Like” (e.g. withdrawal of Pre-tax funds must be deposited in a Pre-tax account)

Need to report on 1040 even if CRD is paid back:

A Form 1099-R will be issued to report the full CRD amount distributed in 2020 (e.g., $100,000), regardless if some or all of the CRD distribution amount is returned by your personal Form 1040 tax return due date including extensions.
The full distribution amount is reported on Form 1040 in box 5a and only the taxable amount for the particular year is reported in 5b with the text “CRD” entered next to the amount entered in 5b.

Example 1:

Taxpayer Ted receives $75,000 CRD on 12/1/2020 and decides to spread taxes over 3 years;
Without recontribution, Ted must include $25,000 on each of his 2020, 2021 and 2022 tax returns;
If Ted makes one and only recontribution of $25,000 on or before 4/15/2022 (or 10/15/2022 if he files a timely extension of his 2021 return) and before he files the 2021 tax return, Ted must include:
- $25,000 on the 2020 tax return;
- $0 in income on the 2021 tax return;
- $25,000 on the 2022 tax return

Example 2:

Same facts as Example 1 except Ted pays back $25,000 after the 2021 tax return deadline.
Ted must include $25,000 on the 2020 tax return, $25,000 on the 2021 tax return and $0 on the 2022 tax return.

Example 3:

Same facts as Example 1 except Ted pays back $75,000 after the 2021 tax return deadline.
Ted must include $25,000 on the 2020 tax return, $25,000 on the 2021 tax return and $0 on the 2022 tax return.
Ted may file an amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution included in income for those years

Example 4:

Taxpayer Ted receives $75,000 CRD on 12/1/2020 and elects to treat 100% of the CRD as 2020 income
Ted recontributes $75,000 on or before 4/15/2021 (or 10/15/2020 if he files a timely extension) and before he files his 2020 tax return
No portion of the CRD is included in income for 2020

Example 5:

Same facts as Example 4 except Ted pays back $75,000 after he files his 2020 tax return and before 12/2/2023.
Ted may file an amended federal income tax return for 2020 to claim a refund of the tax attributable to the amount of the distribution included in income for that year

Example 6:

Taxpayer Ted receives $90,000 CRD on 12/1/2020 and elects to spread taxes over 3 years;
Without recontribution, Ted must include $30,000 on each of his 2020, 2021 and 2022 tax returns;
If Ted makes one and only recontribution of $45,000 on or before 4/15/2022 (or 10/15/2022 if he files a timely extension of his 2021 return) and before he files the 2021 tax return, Ted is permitted to do either one of the following:
Option 1 – Carry Forward:
- $30,000 on the 2020 tax return;
- $0 in income on the 2021 tax return;
- Carry Forward the excess recontribution of $15,000 to 2022 and include $15,000 on the 2022 tax return
Option 2 – Carry Back:
- $30,000 on the 2020 tax return;
- $0 in income on the 2021 tax return & Carry Back the excess recontribution of $15,000 to 2021 and file an amended 2020 return to claim a refund;
- $30,000 on the 2022 tax return