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Taxes Spring Forward

by Keith J. Hardman

Keith J. Hardman
PartnerTalk® // Posted on April 12, 2021

“With the coming of Spring, I am calm again.” – Gustav Mahler

Spring typically brings with it a renewed sense of hope. As the flowers begin to peak out of the ground we ‘spring forward’ and look towards what lies ahead (other than, perhaps, tax-day). And as this first quarter of the year ends it’s important to touch on recent planning items that will likely impact our clients.

First, there is a new tax filing deadline for 2021 for individual federal income taxes. The Internal Revenue Service has declared that it is delaying the traditional tax filing and payment deadline of April 15th for individuals to May 17th for 2020 tax returns. This change is doubtless a response to the many concerns raised by tax preparers and lawmakers that Americans need more time to file and pay taxes this year because of the pandemic and legislative changes made in response to it. As you may remember, last year the pandemic prompted the IRS to postpone the deadline for a broad range of tax filings to July 15th. This year’s delay applies to individuals filing Forms 1040 and 1040-SR. It does not affect deadlines for corporate, partnership or nonprofit tax returns. Importantly, this postponement does not apply to individuals who pay estimated taxes- the deadline for first quarter estimated tax payments remains April 15th.

Also, if needed, an extension to file your 2020 tax return is still available. The deadline to file the 2020 tax return remains October 15th for taxpayers who file Form 4868 to request an automatic extension; the deadline to submit this form is now May 17th, not April 15th. Taxpayers who file for extension will have until October 15th to finish their paperwork, but they must pay what they owe by May 17th or else incur interest and penalties.

As for state tax deadlines, it is expected that most states will conform their deadlines with the new federal deadlines (Louisiana, Texas and Oklahoma delayed their deadlines until June 15 after experiencing severe storms in February).

Regarding 2020 contributions to traditional IRAs, Roth IRAs and HSAs, the IRS has decided to move this deadline back to May 17th as well. For clients planning on contributing to their retirement accounts for 2020 and haven’t yet, we would encourage you not to delay.

Finally, with respect to Required Minimum Distributions (RMD), last year, in response to the pandemic the CARES Act waived RMDs for 2020. That waiver was for one year only, so RMDs are back in effect for 2021.

Unrelated to the pandemic, two important changes made to RMD rules in other legislation became effective in 2020. First, the age at which RMD first applies was changed from 70½ to 72. Second, except for a few types of beneficiaries such as spouses, the so-called “stretch IRA” was eliminated. This took away the ability of an inheriting retirement account beneficiary to “stretch” out IRA distributions over their own lifetime. There is now in its place a new 10-year payout requirement. The new 10-year rule applies only to beneficiaries of persons dying in 2020 or later. Beneficiaries of persons that died in 2019 or earlier may continue to take distributions under the prior rules. Beneficiaries can take any amount that they want from the account, and whenever they want after inheriting – just so long as the entire account is distributed by the end of the 10th year after the year of the original owner’s death.

Beginning in 2022, the IRS has released new tables for the three life expectancy tables affecting RMDs. This welcome change, due to longer life expectancies, will mean smaller minimum distributions next year than under the current tables and consequently less taxation on those retirees. As an example, under the new scale, someone turning 72 in 2022 will have an RMD around 6.5% smaller than before the change by the IRS. This is not to say that everyone currently taking their RMD should expect the same percentage reduction but it is indicative of the coming changes as the IRS adjusts for lengthening life expectancies.

More changes could be on the horizon for RMDs as there is interest in Congress to raise the starting age for RMDs to age 75. This past October, a bipartisan bill was introduced with this very idea. Wide support is a good sign but this may still take years to become law.

Failure to take an RMD will incur a penalty of 50% of the shortfall — one of the stiffest penalties in the IRS tax code. That penalty is in addition to the taxes due on the distribution you take to fix the shortfall.

Please note that this letter is not intended to serve as specific tax advice but simply to highlight some potentially relevant changes for 2021 and beyond.

Should you wish to discuss creating a financial plan tailored to your circumstances, PMA would be happy to work with you on doing so. Please feel free to contact me at my email printed above or the financial advisor with whom you are in regular contact.