March 8, 2022

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Tax Liability

With taxpayers still dealing with the financial fallout from the COVID-19 outbreak, many are falling on hard times and needing to get cash quickly. The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act, has a provision that can aid Americans that are financially strapped.

The CARES Act makes it easier for taxpayers to withdraw funds from their retirement accounts like 401(k)s and traditional Individual Retirement Accounts (IRAs). The temporary changes made to retirement accounts allows taxpayers to make early withdrawals without worrying about tax penalties as well as relaxed rules on loans you take out from your retirement.

What is my retirement contribution limit?

In most cases, taxpayers are able to deduct up to $6,000 for a traditional IRA. If you are 50 years or older, you are able to deduct $7,000. If you have a different retirement account, the amount will differ based on your age and type of plan you have chosen. Your contribution amount may also be limited based on the amount of income you earn.

Here is everything you need to know about the CARES Act.

Eligibility on early withdrawals from retirement accounts with the CARES Act

Some tax-advantaged retirement account holders may not qualify for some of the CARES Act’s relaxed early distribution and loan provisions. Legislation restricts relief to certain participants with a valid COVID-19 related reason in order to receive early access to funds. This includes:

·         If you have been diagnosed with COVID-19.

·         If your spouse or dependent is diagnosed with COVID-19.

·         Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19.

·         Lack of childcare because of COVID-19.

·         Closing or reducing hours of a business owned or operated by an individual or spouse due to COVID-19.

Additional rules for early distribution

Eligible participants in tax-advantaged retirement plans typically have 401(k)s, 403(b)s,457s, and Traditional IRAs. This includes taking an early distribution of up to $100,000 during the calendar year 2020 without having to pay the 10% penalty tax that is typically imposed on most retirement account withdrawals before an account owner is 59 ½.

The act also suspends the mandatory 20% tax withholding requirement that is typically applied to early distributions from a 401(k) or other workplace retirement plan. The CARES Act allows taxpayers up to three years to redeposit the withdrawn money back into their retirement account or pay it all back in 2020 if your income is much lower this year.

Can contributing to an IRA change my tax bracket?

Contributing to your retirement plan can change the tax bracket you are typically in, if your income is near a bracket level. It is important to know that contributing to your plan does not have as big of an effect on your income bracket as you may think because each level of your income is taxed at the income tax rate for that bracket.

If you need tax help, contact us for a free consultation.