You make the call

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.