How To File Taxes On CARES Act IRA Withdrawals
First, let me state that I am not a tax preparer and the information here is general in nature. Please consult with your CPA to confirm that these options will work for your specific situation before putting any of them into play.
While the CARES Act did away with the 10% penalty for early IRA withdrawals in 2020, you will still have to pay income taxes on them. However, one of the great parts of the CARES Act was allowing for the ability to spread those taxes over three years.
If you want to take advantage of this, you will need to file Form 8915-E along with your 2020 taxes. You can find Form 8915-E on the IRS.gov website. It’s a two-page form and is relatively straightforward. (Or it’s at least as straightforward as any tax form could possibly be.)
With Form 8915-E, you can report all of your IRA withdrawal income in 2020 or you can spread it out over the 2020, 2021 and 2022 tax years.
It appears that, should you choose to spread the payments out, you’ll need to file Form 8915-E in 2021 and 2022 as well.
If you’re in a position where you can potentially repay some (or all) of your 2020 CARES Act IRA withdrawal, there are several options available to you.
First and simplest, if you can repay the entire amount before you file your 2020 tax return, then the entire withdrawal will be excluded from your 2020 income. So, the deadline for paying this back would be April 15th, 2021 – or as late as October 15th, 2021 if you file an extension.
Your second repayment option would be to wait until 2022 and make a one-time repayment of some (or all) of the withdrawal. In this case, you would have until December 31st of 2022 to make the repayment.
Finally, you have the option to replace the IRA funds in installments between now and December 31st of 2022.
Amending Your Tax Returns
If you do end up replacing your CARES Act IRA withdrawals, you’ll want to go back and amend your prior tax returns. This way, you can get a refund for the taxes you paid on the withdrawal – it will be as if the withdrawal never happened.
For example, let’s say you took a $3,000 CARES Act IRA withdrawal in 2020 and you decide to spread the taxes out over three years. That would mean that you would include $1,000 of the total $3,000 withdrawal as income on your 2020 tax return.
Let’s say that, in 2021, you transfer money into your IRA, replacing the full $3,000.
You would then have the opportunity to file an amended 2020 tax return and receive a refund. After all, you paid taxes on $1,000 of the $3,000. By replacing those funds, you’re off the hook for those taxes and Uncle Sam would send you a check for the difference.
The same principle would apply for your 2021 tax return if you paid it all back at the end of three years.
Taxes On CARES Act IRA Withdrawals
Again, I am not a professional tax preparer. If you have questions about taxes on CARES Act IRA withdrawals, please consult with your CPA on the best approach for your unique situation.
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