As financial advisers and their clients are aware, the IRS has extended the tax filing deadline from April 15 to July 15 as part of the government’s response to the coronavirus pandemic. Besides deadlines for individuals, the deadline extension applies to some other types of returns as well for 2019 contributions to IRAs and HSAs.
The deadline for filing individual returns has been moved from April 15 to July 15. This also includes extra time to pay any 2019 tax liability. For those having some cash flow issues due to the coronavirus situation this might be quite helpful for them.
Beyond individual returns, the extended filing date includes the payment of second-quarter estimated taxes that would normally be due on June 15, as well as first-quarter estimated payments that were previously due on April 15. The extended filing and payment deadline also extends to returns for partnerships, corporate returns and several other types of entities.
While many of your clients are likely aware of these changes and are already working with their tax professional, this can be a topic of discussion and the source of questions for some of them.
Those expecting a refund should file sooner than this extended deadline, if they haven’t done so already.
Note that the discussion above only pertains to your client’s federal taxes, they will need to check with their own state as to any changes they may have made. Some states have adjusted their deadlines in line with those of the IRS, others may be using other dates or may not have made any adjustments.
Extra Time for 2019 Contributions
As part of these deadline extensions, the deadline to make a 2019 contribution for IRA account was also moved to July 15 from the customary April 15 tax filing date. According to reporting by Kelly Phillips Erb in Forbes, “The IRS has indicated that because the due date for filing federal income tax returns has been postponed to July 15, the deadline for making contributions to your IRA for 2019 is also extended to July 15, 2020.”
For clients who may be a bit short on cash, this gives them a little extra time to make a 2019 IRA contribution. For those whose contribution can be made to a traditional IRA on a pre-tax basis, this will reduce their 2019 tax liability a bit.
For those who haven’t made their 2019 IRA contribution yet, this may be a good time to consider an after-tax contribution to a traditional IRA followed by a backdoor Roth IRA conversion. Low tax rates resulting from tax reform continue to make this a strategy to consider for many people. Doing a backdoor Roth conversion during this period can allow people to invest the money converted during a period when many investments are at relatively low levels compared to those seen in recent years.
In addition to the extra time allowed for 2019 IRA contributions, the IRS has extended the deadline for 2019 contributions to a health savings account (HSA) and to an Archer MSA to July 15 as well. Both of these accounts allow contributions for the prior year up to the tax filing deadline which is now July 15.
For clients who are covered by an eligible high-deductible health insurance plan and who may not have been able to max out their contributions yet, these extra three months provide a window for your clients to increase their contributions for 2019 and receive the tax benefits of doing so.
Other Tax Provisions of the CARES Act
Depending on the situation, any or all of these programs could be of benefit.
At $2.2 trillion, give or take, the CARES Act is the largest economic rescue package in the history of the U.S. By way of comparison, the law’s small business recovery section alone allocates twice as much money in inflation-adjusted dollars as Congress spent to rebuild an entire continent in the Marshall Plan. Read more about the CARES Act here.