Ask Liz Weston

Get smart with your money

Taxes

How filing taxes could generate your coronavirus stimulus check

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Dear Liz: My adjusted gross income in 2019 was too high for me to get a stimulus relief payment. However, my income this year will be much lower and I would qualify. Will I automatically get the stimulus payment when I file my 2020 return or is there something I must do to get the money?

Answer: Just file your 2020 taxes and you’ll get the money.

The recent relief checks of up to $1,200 per adult were created using a refundable credit that will apply to 2020 taxes. (Refundable credits reduce your tax bill dollar for dollar, with any excess refunded to the taxpayer.)

The structure of this refundable credit has created some confusion. Many people thought the payments would reduce the refund they would normally get, but that’s not the case. Rather, the relief checks are an advance on a credit that has been added to their 2020 taxes. When people file their 2020 tax returns, they’ll deduct their relief payments from that new credit. (And although the credits are refundable, the money doesn’t have to be paid back if you got a payment but your 2020 income turns out to be too high.)

If you didn’t get a payment but you qualify based on your 2020 income, you’ll get the credit when you file.

Q&A: Where’s my refund?

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Dear Liz: I filed a paper 2019 federal tax return in mid-February. It’s been more than nine weeks, and they haven’t electronically deposited my refund yet. Last week, I called the “Where’s My Refund” IRS number and got an automated response that basically they couldn’t help me. I then called the taxpayer advocate number listed in the IRS booklet, and they couldn’t help me but transferred me to the IRS’ toll-free number. After taking my information, the service person couldn’t find my return and suggested I resubmit my forms. The whole process took over two hours. Then my brother told me IRS offices are closed or have limited staff and they aren’t processing the tax returns. Why don’t they just say that at the beginning of all of their messages, instead of saying you should get it within six weeks of filing?

Answer: Over the last decade, Congress has cut the IRS’ budget by more than 20% after factoring in inflation, even as the population grew and tax law got ever more complicated. The agency was limping along with ancient technology and too few people to help the public even before the pandemic sent most of its workers home, without the ability to telecommute.

The agency has been trying to recall its workforce as quickly as it can, but there is a truly massive backlog of paper returns that has yet to be processed. Sending out stimulus relief checks has taken priority, and that Herculean effort is still in process.

You may be frustrated by what you perceive as poor customer service, but this situation didn’t develop overnight and taxpayers are reaping what they sowed, or at least reaping what their lawmakers sowed. You should let those lawmakers know how you feel if you want this to change.

And you should change, as well. It is not smart to send a tax return through the U.S. mail. Electronic filing is a much more secure alternative, and it’s quicker. With direct deposit, you can get your refund within days. Even with the pandemic, most e-filers have gotten their refunds promptly.

Q&A: Taxes when inheriting a home

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Dear Liz: My sister recently passed, and I acquired her home, which I’m selling (it’s now in escrow). I was looking at state tax forms for real estate transactions, and there is nowhere to check for a person who was given a home through death. Does this mean it is taxable? I was told since it was an inheritance that it was not taxable.

Answer: Technically, you weren’t given a home. You inherited it, and you’re correct that inheritances are typically not taxable. (Only six states impose inheritance taxes, and your state, California, is not one of them.) When you inherited the home, the property received what’s known as a step-up in tax basis, so that the appreciation that occurred during your sister’s lifetime is not taxed. You would owe tax only on any appreciation that occurred since you owned the property. A tax pro can help you figure out what you might owe.

Q&A: Withdrawing after-tax retirement funds

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Dear Liz: I have been contributing to retirement accounts for many years, starting back in the early 1980s. Back then, there were no deductions for contributions. I made about $50,000 of after-tax contributions, meaning I’ve already paid taxes on that money. Later I switched to before-tax contributions. Now that I am retired and approaching 65, in my feeble mind, I believe I should be able to withdraw that $50,000 without having to pay any taxes on it. However, things that I’ve read indicate that it may not be that easy. Can you help with this question, or at least point me in the right direction?

Answer: You will escape taxes on a portion of any withdrawal you make from a retirement plan that has after-tax money in it, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. However, only Roth IRAs allow you to make totally tax-free withdrawals of your contributions at any time.

With a Roth IRA, any withdrawals are considered first to be a return of contributions. For example, if you contributed $50,000 to an account that’s now worth $200,000, the first $50,000 you withdraw would be tax- and penalty-free, regardless of your age, Luscombe said. If you were under 59½, additional withdrawals could be subject to taxes and penalties.

With regular IRAs and 401(k)s, the tax treatment is different. Withdrawals are considered to be a proportionate return of your after-tax money, Luscombe said. If you contributed $50,000 after tax and then withdrew the same amount from an account now worth $200,000, only one quarter of the money would escape tax.

Q&A: Coronavirus aid law lets you more easily tap retirement savings. That doesn’t mean you should

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Dear Liz: You recently mentioned that a person can withdraw money from their 401(k) and spread the taxes over three years. If 401(k) is paid back, they can amend their tax returns to get those taxes refunded. Because of some major home repairs, I asked our accountant about this before we proceeded. He said that he hasn’t read anything official about the above. Would you please provide where you obtained your information, so we can decide if that’s an avenue we can use?

Answer: It’s possible you had this conversation before March 27, when the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law.

Otherwise, it’s kind of hard to imagine an accountant anywhere in the U.S. who hasn’t heard of the emergency relief package that created the stimulus checks being sent to most Americans, as well as the Paycheck Protection Program’s forgivable loans for businesses and the new coronavirus hardship withdrawal rules for 401(k)s and IRAs.

Those rules allow people who have been affected financially or physically by COVID-19, the disease caused by the novel coronavirus, to get emergency access to their retirement funds if their employers allow it.

Even if you do have access to such a withdrawal, you should consider other avenues first.

The income taxes on retirement plan withdrawals can be substantial, even when spread over three years. Perhaps more importantly, you probably would lose out on future tax-deferred returns that money could have earned because few people who make such withdrawals will be able to pay the money back.

A home equity loan or line of credit is typically a much better option for home repairs, if you can arrange it.

Q&A: Those IRS coronavirus-extended deadlines apply to more than just taxes

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Dear Liz: Now that we’re not required to file our taxes until July 15 this year, has anything been said about pushing back the 2019 contribution deadline for IRAs and Roth IRAs?

Answer: The IRS recently confirmed that the deadline for making contributions to IRAs has also been extended to July 15. The deadlines were pushed back from April 15 because of stay-at-home orders and other disruptions stemming from the coronavirus outbreak.

You can contribute up to $6,000 to IRAs for 2019 if you’re under 50, or $7,000 if you’re 50 or older. The limits are the same for 2020.

You didn’t ask, but the deadline for contributing to a health savings account also has been extended.

HSAs allow people with qualifying high-deductible health insurance plans to put away money that can be used tax-free for eligible medical expenses. The maximum amount individuals can contribute to an HSA is $3,500 for individual coverage and $7,000 for family coverage. The “catch up” provision for people 55 and older allows an additional $1,000 contribution.