• 6550 Rock Spring Drive, Suite 530, Bethesda, MD 20817
  • 301-962-1700
  • mendoza@mendozaco.com

Blog - Tax Related

COVID Relief - 10% Penalty on Retirement Distribution
19
Mar

COVID Relief - 10% Penalty on Retirement Distribution

Written by Alex Mendoza and Marina Stolbovia Be the first to comment!

  Have you withdrawn a portion of your retirement funds due to COVID-19 and are now stuck with paying the 10% early withdrawal penalty? As we know, the pandemic left millions of Americans in economic despair- so it seems unfair that people are still required to pay these penalties when the transfer was made out of necessity. Many people have found themselves in financial hardship and have resorted to taking out some of their retirement funds to stay afloat. Luckily, the IRS has released some recent guidance.

    In the recent publishing of IRS Notice 2020-50, the IRS addressed coronavirus-related distributions within the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Here is the basic rundown of the benefits:

  • Coronavirus-related distributions are no longer subject to the standard 10% early-withdrawal tax.
  • Ability to split total distributions over three years- as you split your debt into multiple years, your taxable income per year is reduced.
    • For example, if you withdraw a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal tax return for each year: 2020, 2021, and 2022.
  • If you wish to repay the distribution, you can complete the payment within three years after the withdrawal date. Like a direct trustee-to-trustee transfer, you will not owe federal income tax on the distribution.
  • Lastly, if you choose to amend your taxes, you may receive a refund from paying the income taxes for the distribution.

 

 To qualify for assistance, the IRS requires an ‘acceptable self-certification’:

  • If you were diagnosed with COVID-19 by a CDC approved test
  • A spouse or dependent was diagnosed with COVID-19 by a CDC approved test
  • If you experienced adverse financial consequences due to you, your spouse, or a member of your household:
    • Being quarantined, furloughed, or laid off, or had work hours reduced due to COVID-19;
    • Being unable to work due to lack of childcare due to COVID-19;
    • Had a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or start date for a job delayed due to COVID-19.

Learn how we turned Martha’s $22,000 tax liability into a tax refund:

Pension Schedule

   Martha came to us after she withdrew $68,643 from her pension plan. Since she distributed her funds before the mandated retirement age, she accrued $6,864 in penalties. On top of the penalties, there are also federal and state taxes, adding $16,000 to her overall bill. Before Martha came to us, she owed $22,864 in taxes and penalties.

    Her husband's furlough from his job last August qualified the couple for relief. After consulting Alejandro, our EA and tax advisor, she was able to abate the $6,864 penalty entirely and split her withdrawal into three separate, taxable distributions. For the years 2020, 2021, and 2022, she will recognize $22,881 from her retirement plan. This way, Martha can meet her family's needs while paying only a fraction of what she owed in taxes. In the end, reducing her taxable income resulted in Martha receiving a tax refund for the 2020 tax year. Thanks to Alejandro, Martha went from being tens of thousands of dollars in debt to the IRS to have the IRS owe her money back during a time of need.

Don't let the pandemic pressure you to go into debt with the IRS. Consult Mendoza&Co today to see how we can work for your tax needs.

Read 838 times

About Us

Mendoza & Company, Inc. is a full-service accounting, Payroll, and Tax Resolution firm in Bethesda, MD and Miami, FL. As a client, you gain a professional team with expertise in multiple fields, providing you the right advice to strengthens your organization and long-term goals.

Mendoza & Company © All Rights Reserved 2019. Powered By mendozaco.com