Question: Patrick, age 50, asked during his tax appointment if he could take a distribution from his IRA in 2021 and still receive the allowed COVID-19 relief provisions under the CARES Act. Will Patrick be subject to the early withdrawal penalty, better known as the 10% additional tax, under §72(t) if he receives the distribution in February 2021?
Answer: Yes, the 2021 IRA distribution to Patrick will be subject to the 10% additional tax (early withdrawal penalty) if no other exceptions apply. The CARES Act provides relief from the early withdrawal penalty for any coronavirus-related distribution of up to $100,000 made on or after Jan. 1, 2020, and before Dec. 31, 2020, to a qualified individual.
Bonus question: stimulus payments
Question: My client is 22 years old and graduated college in May 2020. His parents claimed him as a dependent for 2019 taxes, so he didn’t get a stimulus check in 2020. After graduating college, he became employed and provides more than 50% of his own support, so he is no longer a dependent on his parent’s return. Does this mean he will get a recovery rebate credit (RRC) for $1,200 and $600 on his 2020 tax return due to his change in dependency status?
Answer: Because he is not a dependent, the taxpayer will be eligible for the RRC of $1,200 and $600 when he files his 2020 individual tax return, providing he meets the income level requirements and has a Social Security number valid for employment. The RRC has the same requirements as the economic impact payment.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.