If you took a coronavirus-related distribution from your retirement account, be aware that you have a short window to repay the funds or you’ll owe taxes on the distribution. For 2020 distributions, you have until August 31, 2023 to return the funds to your retirement account. For 2021 distributions, you have until October 15, 2024 to repay the funds. If you do not repay the funds within this timeframe, you will owe income taxes on the distribution, and possibly a 10% penalty if you are under age 59½.
Reporting Coronavirus-Related Distributions
Distributions from your retirement accounts (such as IRAs or 401(k) plans) are generally taxable as income. However, the CARES Act allows you to take up to $100,000 from your retirement accounts in 2020 without paying the 10% early withdrawal penalty.
If you take a coronavirus-related distribution, you must report it on your tax return. You can do this by using Form 8606, Retirement Savings Contributions and Distributions.
Reporting Options
- Option 1: Report the full amount of the distribution as income. You can then claim a credit for any tax you paid on the distribution.
- Option 2: Spread the income over three years. This option is only available if you meet certain requirements.
- Option 3: Roll over the distribution into another retirement account. This option is not available if you have already taken a coronavirus-related distribution from another account.
Table: Reporting Coronavirus-Related Distributions
| Option | How to Report | Tax Consequences |
|—|—|—|
| Option 1 | Report the full amount of the distribution as income on your tax return. | You will pay taxes on the full amount of the distribution. |
| Option 2 | Spread the income over three years on your tax return. | You will pay taxes on one-third of the distribution each year. |
| Option 3 | Roll over the distribution into another retirement account. | You will not pay taxes on the distribution until you withdraw it from the new account. |
Distribution Deadline for Coronavirus Relief
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, provided tax relief to individuals impacted by the COVID-19 pandemic. One provision allowed qualified individuals to withdraw up to $100,000 from their retirement accounts without incurring the usual 10% early withdrawal penalty. However, these distributions are subject to taxation, and the CARES Act established a three-year period (2020-2022) during which the taxes could be paid.
The deadline for making the required tax payments for CARES Act-related distributions has passed. The deadline was different for each year of the three-year period:
- 2020 distributions: April 15, 2022
- 2021 distributions: April 18, 2023
- 2022 distributions: April 15, 2024
If you took a CARES Act distribution and have not yet paid the taxes, you should do so as soon as possible to avoid penalties and interest charges.
| Year of Distribution | Tax Payment Deadline |
|---|---|
| 2020 | April 15, 2022 |
| 2021 | April 18, 2023 |
| 2022 | April 15, 2024 |
Tax Implications of Direct Deposits
The American Rescue Plan Act of 2021 allows penalty-free early withdrawals from retirement accounts for qualified individuals who have been impacted by the COVID-19 pandemic. These withdrawals are subject to income tax, but the tax liability can be spread over three years. However, for direct deposits made in 2020, the tax liability is due in 2021.
Individuals who received direct deposits in 2020 and have not yet filed their 2020 tax return should include the distribution as income on their tax return. They can then choose to pay the tax liability in full or spread it over three years.
Individuals who received direct deposits in 2021 have the option of claiming the distribution as income in 2021 or 2022. If they choose to claim the distribution in 2021, they can pay the tax liability in full or spread it over three years. If they choose to claim the distribution in 2022, they must pay the tax liability in 2022.
- For direct deposits made in 2020, the tax liability is due in 2021.
- Individuals can choose to pay the tax liability in full or spread it over three years.
- For direct deposits made in 2021, individuals can choose to claim the distribution as income in 2021 or 2022.
- If they choose to claim the distribution in 2021, they can pay the tax liability in full or spread it over three years.
- If they choose to claim the distribution in 2022, they must pay the tax liability in 2022.
| Year of Direct Deposit | Tax Liability Due | Claim Distribution As Income |
|---|---|---|
| 2020 | 2021 | N/A |
| 2021 | 2021 or 2022 | 2021 or 2022 |
That’s the scoop on when and how you’ll be taxed on your coronavirus-related distributions. I hope you found this article helpful. If you have any more questions about taxes, be sure to check out the IRS website or consult with a tax professional. I’ll be back later with more tax tips and insights, so stay tuned! In the meantime, keep calm and file on, my friends!