This year will forever be remembered for the pandemic and what it’s done to the lives and livelihoods of so many people. From a tax perspective, several actions that would normally occur have dramatically changed for 2020. Some actions have been delayed, others have been suspended, and still others (like filing and estimated tax deadlines) have been postponed. The usual rules don’t apply in a number of situations. How do these disruptions for 2020 impact you?
Employment tax deferral
Normally, employers are required not only to withhold and deposit the employee share of Social Security and Medicare taxes (FICA), but the employer share as well. For 2020, employers have the option of deferring their Social Security taxes for deposits and payments due on or after March 27, 2020, and before January 1, 2021, as well as deposits and payments due after January 1, 2021, that are required for wages paid during the quarter ending on December 31, 2020. Line 13b of Form 941, which is the quarterly employer return, is used to report the deferred amount of the employer share of Social Security tax.
If you use deferral, then 50% will have to be paid in 2021 and the other 50% in 2022, with no interest accruing on the deferred amounts. Any payments or deposits made before December 31, 2021, are first applied against your payment due on December 31, 2021, and then applied against your payment due on December 31, 2022. The IRS gives this example:
|If your employer share of Social Security tax for the second quarter of 2020 is $20,000 and you deposited $5,000 of the $20,000 during the second quarter of 2020 and defer $15,000 on line 13b, then you must pay $5,000 by December 31, 2021, and $10,000 by December 31, 2022. However, if your employer share of Social Security tax for the second quarter of 2020 was $20,000 and you deposited $15,000 of the $20,000 during the second quarter of 2020 and defer $5,000 on line 13b, then you don’t need to pay any deferred amount by December 31, 2021, because 50% of the amount that could have been deferred ($10,000) has already been paid and is first applied against your payment that would be due on December 31, 2021. Accordingly, you must repay the $5,000 deferral by December 31, 2022.|
Normally, employees who participate in qualified retirement plans and owners of IRAs, as well as beneficiaries who inherit these accounts, must draw down benefits under required minimum distribution (RMD) rules. Participants and owners who attained age 70½ before 2020 would have had to take RMDs in 2020, but they’ve been suspended. No RMDs are required for 2020 for 401(k)s and most other qualified retirement plans as well as for IRAs. But RMDs continue to apply to defined benefit (pension) plans.
The IRS has provided guidance on the ramifications of the suspension of RMDs:
- Those who took them can return them by August 31, 2020. In effect, the IRS has waived the 60-day rollover period to roll distributions back to the plan.
- Beneficiaries who’ve been using the 5-year rule to empty inherited accounts get one more year; ignore 2020.
- Employers’ plans can allow participants to receive waived RMDs (there’s a sample plan amendment in the IRS guidance that can be used for this purpose).
Look for instructions to Form 1099-R on how to report distributions that were taken and then returned. There is no draft out yet.
Changes in health coverage
Normally, employees make their health care elections—whether to join an employer’s group health plan, whether and how much to contribution to a medical FSA—before the start of the year. But for 2020, this has changed with permissible mid-year elections. The IRS has also provided guidance on mid-year changes. Generally, employees are allowed to make prospective changes—a new election, revoking an old election, or changing FSA contribution amounts.
There’s been mush talk about returning to normal or a new normal. From a tax perspective, 2021 won’t be normal. There’s a long way to go to 2021 and you should expect that there will be more tax changes occurring. Consider that dozens of tax rules expire at the end of 2020, there’s a national election, and the future of the pandemic is still uncertain. Deal with what we know but watch for what’s to come.
As Yogi Berra said: “It’s tough to make predictions, especially about the future.”