Due to the COVID-19 pandemic, many Americans not only lost their lives, but their businesses, jobs and livelihood. The CARES Act (Coronavirus Aid, Relief, and Economic Security) was the first of several stimulus packages the government has provided Americans to help keep them going through these tough times. Some of the provisions in the Act allowed for penalty-free use of retirement funds. It’s time to discuss reporting a CARES Act distribution. After all, those funds were not tax free.
- The CARES Act was the first stimulus package to help Americans financially
- The Act included several provisions allowing for easier access to retirement funds
- If you withdrew 401(k) or IRA funds, you must report them when you file taxes
The CARES Act
As you know, the CARES Act provided those Americans in need with stimulus checks. Along with other funding, it also provided small business owners with the money they needed to keep their business afloat and pay employees. This was through the Payroll Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL).
However, there were several ways Americans could tap into his or her retirement funds if they needed more money, whether for their family or a business. One of these was the penalty-free use of up to $100,000 in IRA or 401(k) funds. Under normal circumstances, if you withdrew from your retirement plan before you were age 59 1/2, you would face a 10% penalty. In fact, unless you had a hardship, you could not distribute funds from a current 401(k) plan.
These penalties were waived and anyone with a retirement plan could withdraw funds. You simply needed to satisfy the requirements that you were affected in some way by COVID-19, either health-wise or financially. Many Americans took advantage of this provision and withdraw IRA or 401(k) funds.The CARES Act provisions expired at the end of 2020. Thus far, there have been no talks of extending them, although that could happen in the future.
Reporting a CARES Act Distribution
Of course, withdrawing money from a retirement plan is not without tax consequences. However, the IRS put rules in place to not impact your tax return too greatly at one time. Any funds withdrawn from a 401(k) or IRA is considered earned income and must be reported on your From 1040. You are taxed at your current federal income tax percentage. Your first option is to report the entire amount on your 2020 return and pay all the taxes.
Alternatively, you can include the income ratably over a three year period starting in 2020. For example, if you distributed $30,000, you would include $10,000 of income on your returns for 2020, 2021 and 2022. This allows you to spread your tax burden, especially if you are still suffering financially as this pandemic continues.
Don’t want to pay taxes? You have the option of re-contributing the funds withdrawn within that three year period to any retirement plan. Whatever you are able to return to a retirement plan, will not be taxable. Obviously, if taxes were paid on that income, you will get refunded. If you return the entire distributed amount, you pay zero taxes.
Filing Your Taxes
There have been a lot of questions as we turned the page in the calendar about exactly how you report your CARES Act distribution. The IRS have yet to finalize the details yet. However, they have provided a draft of the form you need to fill out. IRS Form 8915-E (download the pdf) is the proper form you need to fill out and include when you file your taxes.
This form has not yet been finalized by the IRS. Therefore, you cannot file your tax return completely if you took a distribution. We will update this section once the IRS has given more guidance and has finalized 8915-E. It’s not clear as of yet when this will happen. Our advice is to sit tight until the form is available.
UPDATE – February 8, 2021
Alternative Filing Method for E-filed Returns That Include Form 8915-E
Because Form 8915-E is new and impacted by recent legislation, it has not been enabled in XML for e-filing, and e-filed returns are to include an attached PDF of Form 8915-E. As an alternative to attaching a PDF of Form 8915-E, to increase e-filing and reduce paper filing, software providers may instead include with the e-filed return a general dependency statement that includes all the information requested on Form 8915-E if they have issues with attaching a PDF. Such a statement should look similar to the following.
The information needed for the statement can be found by following the link above. It includes you name, Social Security number and info about the distribution.
If you needed to utilize your retirement funds due to the coronavirus, you must make sure to report those funds when you file your taxes. Reporting a CARES Act distribution will be done when you file your 1040 with the IRS. Remember, if you re-contribute funds back into a retirement plan, you will again use Form 8915-E. An amended return must be made so you can recoup any taxes you paid.
If you took a distribution and have questions, feel free to reach out to us @ 800.472.0646. As we mentioned, as soon as we hear from the IRS, we will bring you all the details, both here and on our YouTube channel. Stay tuned!