by Edward A. Zurndorfer–
The deadline for filing 2019 Federal income tax returns that are on extension is October 15, 2020, less than 10 days away. In addition to the 2019 Federal income tax return filing deadline for any individual on extension, October 15, 2020 is the deadline for any individual who made an excess IRA contribution for the year 2019 to withdraw or to recharacterize the excess contribution. This column discusses and explains what the October 15, 2020 deadline means to affected employees who have not filed their 2019 Federal income tax returns and/or who made excess IRA contributions for calendar year 2019.
2019 Federal income tax return filing deadline
Any individual who requested an extension to file his or her 2019 Federal income tax return has until October 15, 2020 to file the return. This is the case even though the filing deadline for individual tax returns on extensions is six months following the normal due date of April 15 for filing individual income tax returns. However, because of the COVID-19 pandemic, the IRS extended the individual tax filing deadline for 2019 Federal income tax returns to July 15, 2020. But the filing deadline for any individual requesting an extension remains at October 15, 2020. This is the case even if an individual may have filed for the extension just prior to the 2019 individual filing deadline of July 15, 2020.
Some individuals are entitled to an automatic extension to file without having to do anything. These individuals include: (1) Members of the military and others serving in combat zones or hazardous zone areas. They have until at least 180 days after they leave the zone to file returns and pay any taxes due; and (2)individuals affected by natural disasters may have extra time. They should read the “disaster relief page” on the IRS web site here.
The IRS recommends that individuals file electronically when possible in order to support social distancing and speed the processing of tax returns, refunds, and payments.
With respect to making payments to the IRS, there are reports of individuals who have mailed checks to the IRS that remain uncashed. The IRS has acknowledged that this is a problem, noting that if an individual mailed a check to the IRS either with or without a tax return, the letter containing the check may still be unopened in the backlog of mail the IRS is still processing due to COVID-19. The IRS went on to say that once the IRS catches up, any payments will be posted on the date the IRS received the letters containing the payments, rather than on the date the IRS processes the payments.
Given this information about IRS payments via check through the mail, it should be clear that the fastest and most efficient way to get a payment acknowledged is to pay electronically. Federal tax payments can be scheduled through the October 15, 2020 due date. There are a variety of ways to pay including by wire, electronic fund withdrawals from a bank account, IRS Direct Pay, or with a credit or debit card.
If anyone is expecting a 2019 Federal income tax refund, the IRS encourages direct deposit. Direct deposit is faster than waiting for a paper check to arrive in the mail. Anyone who needs to check the status of a refund can use the Where’s My Refund? Tool on the IRS web site here.
Correcting an excess IRA contribution for 2019
Each year, the amount that individuals can contribute to their IRA’s is limited. For the year 2019, individuals can contribute a maximum of $6,000 ($7,000 if the individual is over age 49 as of Dec. 31, 2019). Note that the $6,000/$7,000 2019 IRS contribution limit includes the total contributions made to traditional IRAs and Roth IRAs by individuals between Jan. 1, 2019 and July 15, 2020 (the filing deadline for 2019 individual tax returns).
It is not uncommon that an individual exceeds the annual IRA contribution dollar limit. Fortunately, there is an easy fix for excess IRA contributions. But there is a deadline for making this fix – namely, October 15, 2020 – for excess 2019 IRA contributions. This is the case even if one has already filed his or her 2019 Federal income tax returns.
Generally, for 2019, an excess contribution is the amount contributed (other than rollover contributions) to an individual’s IRAs for the year 2019 that is more than the smaller of:
- $6,000 ($7,000 if age 50 or older by Dec. 31, 2019; or
- Compensation for the year
Tax consequences and penalties on excess IRA contributions
If a 2019 excess IRA contribution is not withdrawn by the 2019 Federal income tax extension filing date of October 15, 2020, a 6 percent excess contribution penalty tax applies. The 6 percent tax must be paid each year an individual’s excess contribution amounts remain in the individual’s IRA as of December 31st. The following example illustrates:
Phillip, age 43, is a Federal employee. For 2019, his salary is $110,000 and he contributed $6,500 to his Rot IRA. Phillip has made an excess contribution to his IRA of $500 ($6,500 minus the $6,000 limit). The contribution earned $10 interest in 2019 and $25 interest in 2020 before October 15, 2020. Phillip does not withdraw the $500 or the interest it earned by October 15, 2020. His penalty tax on the excess contribution for 2020 is $30 ($500 excess contribution times 6 percent).
IRS Form 5329 (Additional Taxes on Qualified Plans Including IRAs and Other Tax Favored Accounts) is filed to report the tax on excess IRA contributions.
Excess IRA contributions withdrawn by return due date
The 6 percent penalty tax is not imposed if the excess IRA contributions, plus any income earned on the excess contribution, is withdrawn by the due date, including extensions of the tax return for that year. For 2019 excess IRA contributions, that means no 6 percent penalty tax will not be imposed if the excess IRA contributions and income attributed to the excess contributions are withdrawn by October 15, 2020.
An excess IRA contribution that is withdrawn from an individual’s traditional IRA before October 15, 2020 will not be subject to any tax and to an excess contribution penalty if both of the following conditions are met: (1) No deduction was allowed for the excess contribution; and (2) any income attributed to the excess IRA contribution for 2019 is also withdrawn. Note that in the case of an excess Roth IRA contribution, the withdrawn excess contribution amount is never taxable because Roth IRA contributions are made with after-taxed dollars.
The income attributable to the excess 2019 IRA contribution, whether it comes from a traditional IRA or a Roth IRA, is taxable income. The income will be included on the IRA owner’s 2019 Federal income tax return. The withdrawal of income may be subject to the 10 percent penalty tax on early distributions if the IRA owner is under age 59.5 at the time of distribution.
Recharacterizing 2019 Roth IRA contributions
Another example of making an excess IRA contribution is when an individual exceeds the annual income limit for contributing to a Roth IRA. In particular, for the year 2019 the income limits that apply to individuals contributing to their Roth IRA is presented in the table below.
Unlike traditional IRAs, there are income limits for contributing to a Roth IRA. What this means is that when an individual’s income level (depending on the individual’s tax filing status)) exceeds a certain amount in a given year, the individual is not permitted to contribute to his or her Roth IRA for that year. The following table summarizes the Roth IRA income limitations for making contributions for the year 2019:
The Roth IRA contribution limit is reduced when modified adjusted gross income (MAGI)* reaches certain levels.
Roth IRA Contribution “Phase-Out (2019)”
|Married Filing Jointly or Qualified Widow(er)||$193,000 – $203,000|
|Single or Head of Household||$122,000 – $137,000|
|Married Filing Separate||$0 – $10,000|
*MAGI = Adjusted Gross Income
– Income from Roth IRA conversions
– Income from Roth IRA rollovers from employer retirement plans
+ deduction for traditional IRA contributions
+ student loan interest deduction
+ tuition and fees deduction
+ foreign earned income deduction
+ foreign housing exclusion or deduction
+ exclusion of qualified bond interest used for education
The following example illustrates:
Jason is a 47-year-old Federal employee who is married and files jointly with his wife Helen. Jason’s and Helen’s income for 2019 includes $160,000 of wages, $25,000 of dividends, $10,000 of capital gains, and $20,000 of net rental income for a total gross income of $215,000 with no adjustments to income. Jason contributed $6,000 to his Roth IRA during 2019. Jason’s and Helen’s MAGI is $215,000, which is above the Roth IRA MAGI contribution limit of $203,000 for 2019.
Jason has until October 15, 2020 to withdraw his $6,000 Roth IRA contribution and all of the earnings attributed to the $6,000 contribution. If he does not, then the $6,000 contribution will be considered as an excess IRA contribution, subject to a 6 percent penalty tax ($360, 6 percent of $6,000) on the excess IRA contribution.
If Jason does withdraw the $6,000 Roth IRA contribution by October 15, 2020, then there will be no 6 percent excess contribution penalty. The $6,000 distribution is not taxable because Roth IRA contributions are made with after-taxed dollars. With respect to the earnings attributable to the $6,000 contribution, the withdrawn earnings will be taxable income in the year received. This means if Jason receives the earnings is 2020, he will include the income on his 2020 Federal income tax return. Although the earnings are taxable and Jason is under age 59.5, there is no IRS early withdrawal penalty.
Recharacterizing a Roth IRA contribution
Another option for undoing a Roth IRA contribution is to “recharacterize” the contribution. In general, individuals can recharacterize an IRA contribution by making a trustee-to-trustee transfer from one IRA to another type of IRA. If an individual properly elects to recharacterize the contribution, it is treated as if it were originally made to the second IRA, instead of the first IRA. Any earnings transferred from the first IRA to the second IRA are treated as if it was earned in the second IRA.
Any individual with earned income can always contribute to a nondeductible traditional IRA. There are no income limitations. But IRS Form 8606 (Nondeductible IRAs) has to be filled out and submitted reporting the nondeductible traditional IRA contribution. This means that an individual who contributes to a Roth IRA but subsequently discovers that his or her income exceeded the MAGI limit for that year, thereby making the Roth IRA contribution as an “excess” contributions, can recharacterize the Roth IRA contribution as a nondeductible traditional IRA contribution. If done in a timely basis there will be no excess contribution penalty.
In the example above, if Jason recharacterized his 2019 Roth IRA contribution as a nondeductible traditional IRA contribution for 2019 no later than October 15, 2020, he will not be subject to a 6 percent excess IRS contribution penalty.
Any individual who needs to, or wants to, recharacterize a 2019 or 2020 IRA contribution is highly recommended to speak with a tax professional in order to properly perform the recharacterization.
Finally, effective Jan. 1, 2018, pursuant to the Tax Cuts and Jobs Act of 2017, a conversion from a traditional IRA to a Roth IRA cannot be recharacterized. Only Roth IRA contributions can be recharacterized.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
2019 Federal Income Tax Returns Deadline