Tax Rules for CARES Act IRA Withdrawals

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced special provisions for 2020 retirement plan distributions, known as a “coronavirus-related distribution” (CRD). While the window for taking these distributions closed on December 30, 2020, the unique tax and repayment rules associated with them continue to affect taxpayers. The options for reporting income and making repayments extend well beyond 2020, making these regulations important for anyone who used this relief measure.

Eligibility for Coronavirus-Related Distributions

To take a coronavirus-related distribution, an individual had to meet criteria designating them as a “qualified individual.” This status was granted if the person, their spouse, or a dependent was diagnosed with the virus. It also extended to those who experienced adverse financial consequences from the pandemic, such as:

• Being quarantined, furloughed, or laid off.
• Having work hours reduced.
• Being unable to work due to a lack of childcare caused by the pandemic.
• Closing or reducing the hours of a business they owned as a partner or sole proprietor.

A coronavirus-related distribution was defined as a withdrawal of up to $100,000 from an eligible retirement plan, such as an IRA, 401(k), or 403(b). This aggregate limit applied per person, not per plan, and the distribution had to be made during the 2020 calendar year.

Tax Treatment of the Distribution

A primary benefit of classifying a withdrawal as a CRD was the waiver of the standard 10% additional tax on early distributions for individuals under age 59 ½. This relief applied automatically to any distribution that met the CRD qualifications.

Beyond the penalty waiver, taxpayers were given a choice for how to recognize the distribution as income. The first option was to include the entire amount of the distribution in their gross income for the 2020 tax year. This approach concentrates the tax impact into a single year.

The second option allowed taxpayers to spread the income inclusion ratably over a three-year period. This meant one-third of the distribution amount would be included in income for 2020, one-third for 2021, and the final third for 2022. For example, a person who took a $30,000 CRD could report $10,000 of income on their federal tax return for each of the three years. This method helped mitigate the tax burden by preventing the distribution from pushing the taxpayer into a higher tax bracket.

This three-year spread was the default method unless the taxpayer actively elected to include all the income in 2020. The choice was made on the tax return for the year of the distribution.

Repaying the Distribution

The CARES Act provided a window for individuals to repay a coronavirus-related distribution. A qualified individual has up to three years from the day after they received the distribution to repay any or all of the funds to an eligible retirement plan. This repayment is treated as a rollover, not a new contribution.

These repayments are not included in the recipient’s income for the year of the repayment. Furthermore, the repayment is not subject to the one-rollover-per-year limitation that normally applies to IRAs. This allows for flexibility in returning the funds, as an individual could make multiple repayments to one or more retirement accounts within the three-year period.

The primary tax consequence of making a repayment relates to previously paid taxes. If a taxpayer included all or part of a CRD in their income for a prior year and then repaid that amount, they are permitted to file an amended tax return for the prior year to claim a refund.

For instance, if a taxpayer took a $30,000 CRD in 2020 using the three-year spread, they would report $10,000 of income on their 2020 return. If they repaid the full $30,000 in 2022, they could file an amended 2020 return to remove that $10,000 of income and receive a refund. They would also not report the remaining income on their 2021 and 2022 returns.

Reporting on Your Tax Return

The primary tool for managing the tax implications of a CRD is IRS Form 8915-F, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. This form is used to report CRD activity across the three-year period, including your decision to use the three-year income spread and to track any repayments made.

When filing a tax return for a year in which CRD income is recognized under the spread option, such as 2021 or 2022, Form 8915-F is used to calculate the specific portion of the distribution to include in that year’s income. The form separates the reporting for distributions from IRAs and other types of retirement plans.

The form is also where repayments are officially reported to the IRS. When a repayment is made, it is entered on Form 8915-F for the year the repayment occurred. This reported repayment directly reduces the amount of the distribution that is considered taxable income for that year. If the repayment exceeds the amount of income that would have been recognized in that year, the excess can be carried back to a prior year.

If a repayment necessitates amending a prior year’s return to claim a refund, Form 8915-F must be completed again for that prior year, showing the repayment. This updated Form 8915-F is then filed along with Form 1040-X, Amended U.S. Individual Income Tax Return.