IRS Enables Millions to Qualify for the $100,000 IRA Grab and Repay

New IRS guidance expands the possibilities for what is an
adverse COVID-19 impact on you for purposes of taking up to $100,000 out of
your retirement accounts and repaying it without penalties.

First, let’s look at the rules as they existed before this
new IRS guidance. The CARES Act created the first set of favorable rules, and
those rules are still in play.

What the CARES Act Says

A coronavirus-related distribution from your qualified
retirement plan, Section 403(b) plan, or IRA gets two tax benefits:

1. If you withdraw and keep the money, you pay no 10 percent
   early withdrawal penalty and you can spread the income equally over tax
   years 2020, 2021, and 2022. You also can elect to include it all in tax
   year 2020, if you want.
2. You can repay the money within three years of the
   distribution date and pay no tax or penalty on the amount.

Under the CARES Act relief, you qualify for a
coronavirus-related distribution if

• you, your spouse, or your dependent is diagnosed with
  COVID-19 with a CDC-approved test;
• you experience adverse financial consequences as a result
  of being quarantined, being furloughed or laid off, or having work hours
  reduced due to COVID-19;
• you experience adverse financial consequences as a result
  of being unable to work due to lack of childcare due to COVID-19; or
• you experience adverse financial consequences as a result
  of closing or reducing your business hours due to COVID-19.

And then there are two additional CARES Act rules for
coronavirus-related distributions:

1. You can’t treat more than $100,000 per person as a
   coronavirus-related distribution, and
2. You must take the distribution on or after January 1, 2020,
   and before December 31, 2020.

IRS Expands Relief

With the new IRS relief, you now also qualify for
coronavirus-related distributions if you experience adverse financial
consequences because

• you, your spouse, or a member of your household has a
  reduction in pay or self-employment income due to COVID-19;
• you, your spouse, or a member of your household has a job
  offer rescinded or start date for a job delayed due to COVID-19;
• your spouse or a member of your household is quarantined, is
  furloughed or laid off, or has work hours reduced, due to COVID-19;
• your spouse or a member of your household is unable to
  work due to lack of childcare due to COVID-19; or
• your spouse or a member of your household owns or operates
  a business that closed or reduced hours due to COVID-19.

Household

For purposes of applying the additional factors, a member of
the individual’s household is someone who shares the individual’s principal
residence.

Merriam-Webster defines a household as

• those who dwell under the same roof and compose a family,
  and
• a social unit composed of those living together in the
  same dwelling.

You have to think roommates living together create a
household, and if one of them is affected by COVID-19—say, lost his or her job
and stopped contributing to the rent—the remaining roommates were adversely
affected and should be entitled to the IRA grab and repay strategy.

Your Repayment Options

You have many repayment options, as we explain below. To
make this easy, let’s say you grab $30,000 from your IRA today and you want to
know how you can repay the $30,000 with no taxes or penalties. Here are five
scenarios:

Scenario 1. You repay the $30,000 before you timely
file your 2020 tax return:

• You don’t include any of the $30,000 in income on your
  2020 tax return. You pay no taxes or penalties.

Scenario 2. You elect to include all $30,000 as
income on your timely filed 2020 tax return, but then repay the full $30,000
sometime between filing the 2020 return and July 15, 2023:

• You amend your 2020 tax return to remove the $30,000 from
  income and claim a refund of tax paid on that amount.

Scenario 3. You include $10,000 as income on your
timely filed 2020 tax return, but then repay the full $30,000 sometime between
filing the 2020 return and July 15, 2023:

• You claim $10,000 of income on your original 2020 tax
  return, and
• You later amend your 2020 tax return to remove the $10,000
  from income and claim a refund of tax paid on that amount.

Scenario 4. You include $10,000 as income on your
timely filed 2020 tax return, but then decide to repay $10,000 of the total
$30,000 distribution, which you do on March 1, 2022:

• You claim $10,000 of income on your 2020 tax return,
• You claim no income on your 2021 tax return (because you
  made the $10,000 repayment prior to filing the return), and
• You claim $10,000 of income on your 2022 tax return.

Scenario 5. You include $10,000 as income on your
timely filed 2020 tax return, but then decide to repay $20,000 of the total
$30,000 distribution, which you do on November 1, 2021. This one is tricky
because you have two ways to do it:

• You claim no income from the distribution on either your
  2021 or 2022 tax return, or
• You claim $10,000 of income on your 2022 tax return and
  amend your 2020 tax return to remove the $10,000 from income and claim a
  refund of tax paid on that amount.

As you can see, you have many options when it comes to
taking up to $100,000 from your retirement plan. If you would like to discuss
your options with me, please call me on my direct line at 408-778-9651.

For example, you could hire your under-age-18 children, pay
them, say, $10,000 each, and they could pay zero federal income taxes. And you
or your corporation, the employer, would deduct the $10,000 you paid to each of
the children.

The child wins. You win. There’s more.

Schedule C Business

Let’s say you operate your business as a sole
proprietorship, a single-member LLC that’s treated as a sole proprietorship for
tax purposes, a husband-wife partnership, or an LLC that’s treated as a
husband-wife partnership for tax purposes. Good!

That means you can hire your under-age-18 child, and the
child’s wages will be completely exempt from Social Security and Medicare taxes
(FICA tax) and FUTA taxes.

To be clear, the FICA tax exemption applies to the
employee’s share of FICA tax that’s withheld from the employee’s paychecks and
to the employer’s share of FICA tax that your business must pay over to the
Feds. You have to like that!

For 2020, your under-age-18
employee-child’s standard deduction will shelter from federal income tax
the first $12,400 of wages received if the child has no taxable income from
other sources. No federal income taxes for this child. You have to like that too!

You can hire the under-age-18
child part-time, full-time, or whatever works for you and the child. Right now,
children in this age category are probably not attending school, and the school
district’s lengthy summer vacation may have already begun.

In the fall, will your under-age-18 child be attending
school in person or online? You probably don’t know anything for sure at this
point. But in the COVID-19 era, your under-age-18 child’s availability to work
in your business may be at an all-time high.

The wages received by your child can be used to help keep
the family afloat financially. If the family is not so financially stressed,
your child can use some or all of the wages to fund a college savings account
or make a Roth IRA contribution.

What if My Business Is Incorporated?

If you operate your business as an S
or a C corporation, your child’s wages received from the business are subject
to FICA and FUTA taxes, just like any other employee, regardless of the child’s
age.

What if I Hire a Family Member over Age 21?

Do it! The wages received from your business are subject to FICA
and FUTA taxes, just like any other employee. This is the case whether you operate
your business as an unincorporated sole proprietorship, a partnership, or an LLC
or as an S or a C corporation.

Tax Advantages for Your Business

When you hire a child or other family member, your business deducts
the wages paid.

• If you operate the business as a sole proprietorship, a single-member
  LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife
  partnership, an LLC that’s treated as a husband-wife partnership for tax
  purposes, or an S corporation, the wage expense deduction reduces (a) your
  individual federal taxable income, (b) your individual net self-employment
  income, and (c) your individual state taxable income (if applicable).
• If you operate the business as a
  C corporation, the corporation deducts the wages paid to a child or other family
  member. The deductions reduce the corporation’s federal taxable income and
  probably the corporation’s state taxable income (if applicable).
• If your business will be unprofitable this year
  due to the COVID-19 fallout, deductions for wages paid to a child or other
  family member can create or increase a net operating loss (NOL) for 2020.
  If so, you can carry back the 2020 NOL for up to five tax years—back to
  2015. The NOL carryback can trigger a refund of income taxes paid for the
  carryback year. That can really help. An NOL carried back to a pre-2018
  tax year can be especially helpful, because tax rates were generally
  higher in those days.

Keep payroll records just like you would for any other
employee to document hours worked and duties performed (e.g., timesheets and
job descriptions).

Issue W-2s just like you would for any other employee.

If you would like to discuss the tax and financial benefits
of hiring family members, please don’t hesitate to call me on my direct line at
408-778-9651.