October 15, 2020 is the deadline for filing 2019 federal income tax returns that are on extension. October 15, 2020 is also the deadline for withdrawing excess 2019 IRA contributions and for recharacterizing 2019 IRA contributions.
This column discusses what the October 15th deadline means for affected federal employees and retirees.
Filing deadline for 2019 federal income tax returns on extension
Any individual who requested an extension for filing his or her 2019 federal income tax return has about two weeks remaining to file the return. The deadline to file 2019 federal income tax returns on extension is October 15, 2020.
October 15th is the same deadline to file a federal income tax return on extension in any normal year. But since the year 2020 has been anything but normal with respect to filing individual income tax returns, some individuals may not be aware of the 2019 income tax return filing extension due date.
In general, the IRS gives individuals six months from the normal income tax return filing due date – April 15 – to file one’s income tax return and still be timely, assuming an individual files for an extension. Six months from April 15th is October 15th.
But this year because of the COVID-19 pandemic, the official 2019 Federal income tax return official filing due date for individual tax returns was postponed three months to July 15, 2020. But the request for extension starts from the original due date (April 15) and not the revised due date (July 15). That means that all individuals must file their2019 federal income tax returns on or before October 15, 2020, even if the filing extension request was made in July 2020.
Automatic extension of time to file
Some individuals are entitled to an automatic extension of time to file their income taxes without having to do anything.
These individuals include:
(1) Members of the military and others serving in combat zones or hazardous zone areas who generally have at least 180 days after they leave the zone to tile returns and pay any taxes due; and
(2) individuals affected by natural disasters may have extra time. For more details, they should check the “disaster relief page” on the IRS website here.
Consider filing and paying electronically
The IRS recommends that individuals and tax preparers file electronically when possible to support social distancing and speed the processing of tax returns, refunds, and payments.
Forgetting to file for an extension
Any individual who did not request an extension to file 2019 federal income taxes should file and pay as much as possible in order to reduce any penalties and interest changes that might be due.
Excess 2019 IRA contributions and recharacterizations
Individuals often make IRA contributions above the allowable contribution limit for that year. Examples of excess contributions include:
· Exceeding the annual contribution limit (for 2019, $6,000 plus an additional $1,000 for individuals age 50 or older as of Dec. 31, 2019).
· Making a Roth IRA contribution when an individual exceeds the income limit. The Roth IRA contributions phase-out for 2019 begins and ends at modified adjusted gross income (AGI) as follows:
· Rolling over an amount not eligible for rollover. For example, rolling over beyond the 60-day deadline.
Fortunately, there is a relatively easy way to correct an excess 2019 IRA contribution or correcting a 2019 Roth IRA contribution when one’s income exceeds the allowable modified AGI limit. Note that this correction action may be performed even if one has already filed his or her 2019 income tax return. But the deadline to do so is October 15, 2020.
An excess IRA contribution to either a traditional IRA or to a Roth IRA can be fixed by withdrawing the contribution plus any net income attributable, such as earnings or losses in the IRA account attributable to the excess contribution. The excess 2019 contribution must be withdrawn by Oct. 15, 2020. If the Oct 15,2020 deadline is missed, the excess amount will be subject to a 6 percent excess contribution penalty each year it remains in the IRA.
The following example illustrates:
Judy, single and age 45, contribute $6,000 to a Roth IRA on July 1, 2019. During the period July 1 through Dec. 31, 2019, the Roth IRA had total earnings of $800. In January 2020, Judy totaled her income she received during 2019, including salary income, interest and dividends, capital gains and rental income. Her modified AGI totaled $152,000, above the 2019 Roth IRA modified AGI limit for a single individual earning $137,000.
In late September 2020, Judy notifies her Roth IRA custodian, requesting a full withdrawal of her Roth IRA equal to $6,800. She receives her Roth IRA contribution of $6,000 and the accrued net earnings of $800. The $6,000 Roth IRA contribution is not taxable because Roth IRA contributions are made with after-taxed dollars. But the $800 of accrued earnings is taxable and will be included as income on Judy’s 2020 income tax return. This is because she received the $800 of income in 2020. But the accrued earnings are not subject to any IRS penalties.
An excess Roth IRA contribution – the result of an individual whose income is above the modified adjusted gross income limits and is therefore not eligible to make a Roth IRA contribution for that year – can also be fixed by “recharacterizing” it as a nondeductible traditional IRA contribution.
Similarly, a traditional IRA contribution can be recharacterized as a Roth contribution if, for example, it is later found nondeductible and the account owner would prefer a Roth IRA. The contribution, plus any net income attributable to the IRA contribution, must be recharacterized. The deadline for recharacterizing a 2019 Roth IRA contribution is also Oct. 15, 2020.
Any individual who wants or needs to recharacterize a 2019 IRA contribution is strongly advised to speak with a tax professional in order to properly perform a recharacterization. The process can be tricky, and professional tax guidance is highly recommended.
Finally, as a result of the 2017 Tax Cuts and Jobs Act, Roth IRA conversions can no longer be recharacterized. Any individual who converted a traditional IRA to a Roth IRA during 2019 is not allowed to recharacterize the conversion.