On December 27, 2020, the President signed into law the Consolidated Appropriations Act, 2021. Though the Act is likely best known for providing a second stimulus check of up to $600 to many individuals and up to $1,200 to many married couples, it also enhances and expands specific provisions of the Coronavirus Aid, Relief, and Economic Security Act (i.e., CARES Act) including some relating to distributions from individual retirement accounts (IRAs).
Distributions for medical expenses
The 10 percent additional tax generally applies to the taxable portion of an IRA distribution taken by an IRA owner before age 59½; however, it may not apply to distributions taken to pay for the unreimbursed medical expenses of the IRA owner, his/her spouse, or a dependent of the IRA owner. An IRA distribution taken and applied to pay medical expenses, defined under Internal Revenue Code (IRC) Section 213, are exempt from the 10 percent additional tax only if the expenses exceed 7.5 percent of the IRA owner’s adjusted gross income (AGI) reported on his/her federal income tax return and only if they would otherwise qualify as itemized deductions (but are not required to be itemized) on the IRA owner’s tax return for the year the distribution was made. This threshold was previously set at 10 percent of AGI but was reduced to 7.5 percent of AGI for tax years 2019 and 2020. The reduction to 7.5 percent of AGI has been made permanent.
Disaster relief distributions
Relief is available to an individual who has suffered economic losses because of a "qualified disaster," considering his/her principal residence is in a ‘Presidentially Declared’ qualified disaster area. Distributions of up to $100,000 can be taken from retirement plans, including IRAs, for each declared disaster incident taking place beginning on or after December 28, 2019, and before December 28, 2020. Additionally, the deadline to take such distributions is June 25, 2021. The qualified disaster distributions are not subject to the 10 percent additional tax for distributions received before age 59½, can be included in income over a three-year period unless the IRA owner chooses to pay all of the tax in the year received, and can be repaid to an IRA within three years of the day after the distribution’s receipt.For an opportunity to learn more about IRAs and other tax-advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.