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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I've got some fun news to share with you. But first, I've got a couple of quick tax tips for everyone that just wrapped up their 2020 tax return.
As you might remember, part of the CARES Act that rolled out last year included coronavirus relief on qualified retirement distributions. In short, distributions from a traditional 401k or IRA up to $100,000 in 2020 might qualify for what's called a qualified disaster retirement plan distribution.
If you're under age 59 and a half and qualified for a disaster retirement plan distribution, the 10% early withdrawal penalty is waived. In addition, anyone who took an eligible withdrawal can spread the tax liability out over three years. So if your withdrawal triggered, let's say a $9,000 tax bill in 2020, you can pay $3,000 for the next three years, 2020, 2021 and 2022.
or you can opt to pay the entire $9,000 tax bill with your 2020 tax return. You can also choose to repay the withdrawal within three years of taking it by making one or more contributions back to your retirement account. Now, to qualify, you, your spouse, or a dependent had to have either been diagnosed with coronavirus by a CDC-approved test or
or have experienced coronavirus-related adverse financial conditions as a result of one of these four things. One, being quarantined, furloughed, laid off, or having work hours reduced. Two, being unable to work due to lack of childcare.
Three, having to close or reduce hours of a business owned or operated by the affected individual. Or four, having a reduction in pay or self-employment income or having a job offer rescinded or delayed. In other words, just about everyone could theoretically check one of those boxes. And that's exactly what's happening.
we're discovering that accountants and CPAs are checking the box on behalf of their clients in an effort to reduce the current year tax bill. And this is one of my issues with CPAs that don't practice long-term tax planning. They're looking at each year in a vacuum. They're looking at 2020 and they're trying to figure out how can I save my clients money this year without considering how that might impact them next year and beyond.
And as our listeners know, sometimes it can make a lot of sense to pay more in taxes this year in order to save money next year and the year after and in retirement. But high volume accountants who are cranking out hundreds or even thousands of tax returns each year, they don't have the time to do that type of in-depth long term planning. And their clients love hearing from them when they say that they were able to save them money this year.
So why is this a problem and what action should you take? The problem again is that we're finding out CPAs and accountants are just checking this box without taking long-term planning into consideration and sometimes without informing the client of the impact. And this could disrupt any tax planning that you did in 2020 or tax planning that you plan to do or maybe should be doing in 2021 and 2022.
Remember, the default is that the tax liability is spread out for three years. So you could have some extra income floating into 2021 and 2022 that you didn't expect due to how your return was filed in 2020. Now, the good news is, is that it's pretty easy to figure out if you or your CPA claimed a qualified disaster retirement plan distribution.
All you need to do is look for Form 8915-E, which would have been filed with your Form 1040. Now, unfortunately, if this was filed without your knowledge, I don't know exactly how to fix it given that the IRS said that this election is irrevocable.
But knowledge is power. So at the very least, you can have this information and plan accordingly for the next two tax years. Or perhaps your accountant has a path for making a correction. Or by the time you hear this and go to your accountant, the IRS has issued some new guidance.
While we're at it, one other area of confusion to take note of is caused by the waiver of required minimum distributions, which was also part of the CARES Act. So in short, if you took a required minimum distribution, an RMD, last year,
and then subsequently returned it after learning about the CARES Act waiver, it's possible that your custodian showed it as a taxable distribution with no indication of the RMD being returned. So if you took an RMD last year and then put it back and you want to confirm that your return was filed properly, check with your accountant or just simply review lines 4A and 4B on your 1040.
4A would show the taxable distribution for the RMD, and then 4B would say something like rollover or rollover with $0. So while these two tax tips might not apply to you, it is possible that they apply to a friend or a family member.
If you have someone that you know that took retirement distributions last year, maybe it's a family member that you oversee their finances for, it would be wise to help them check to ensure that things were filed correctly to help them avoid any surprises next year and beyond. And this is exactly why we review all client tax returns right after they're filed, not only to help with our tax punting efforts, but also to double check the final outcome of the return. In fact,
We recently came across a very basic and honest mistake made by a client CPA where we were able to save the client about $30,000 just because we lent a second pair of eyes on their tax return. So be sure to double check those tax returns, make sure everything was filed correctly. And again, knowledge is power.
Okay, we have the rest of the year to nerd out on tax planning. So I'm going to stop there for today. Now on to the fun news. We are having a baby. As of now, the baby is a full breach. So it's looking like we'll be going in. If she doesn't move soon, it's looking like we'll be going in next week for a planned C-section. And to help ensure that this
that this podcast continues to deliver high quality retirement planning, investing content while I'm with the family next month, Jeremy Schneider will be back guest hosting this show. Some of you might remember Jeremy from last year. He's the founder of Personal Finance Club, an online community for individual investors and an Instagram account with over 250,000 followers.
Jeremy just has such a special and unique way of breaking complex financial topics down into plain English, which is exactly what this show is all about. So get ready for a fun month with Jeremy starting next Tuesday, June 1st, where Jeremy is going to be talking about market timing, lump sum investing, dollar cost averaging, and how to approach investing a windfall of money.
As always, don't hesitate to send me an email even while I'm out with any questions, comments, or feedback. I love to hear from you guys. You can email me directly at podcast at youstaywealthy.com. That's podcast at youstaywealthy.com.
I hope you enjoy your time with Jeremy, and I look forward to getting back behind the microphone in July. I will see you then.