Maximizing Benefits Under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the attempt by Congress to reduce the economic dislocation caused by the current pandemic. Taxes play a key role in the Act, along with several economic stimulus policies. 

Normally a new tax law requires time to figure out all the details. The Tax Cuts and Jobs Act (TCJA) of 2017 is still looking for clarifications on several issues, some of which are addressed in the CARES Act. COVID-19 had pushed economic decline into overdrive. The American economy has never declined at such a pace. Businesses and individuals went from good economic conditions to millions unemployed and many businesses forced to close. A draconian stimulus package was required.

The CARES Act is $2.2 trillion of federal stimulus. With no time to iron out the details, rumors are flying. Normally reputable sources of information are struggling to get facts out. Misinformation is rampant. This post, along with the accompanying Facebook Live event, will outline the facts as they currently stand. The facts might change is some situations. I will correct those errors in this post periodically so you have a reliable resource.  There are many instances where the only answer is: I don’t know. Because nobody does, even the people in charge of the programs. 

I broke this post into sections covering several of the most important points of the CARES Act. While I might touch on issues in the Family and Medical Leave Act (FMLA), it is not the focus of this post. This post has many links to reputable sources. Use them, as they will contain additional updated information.

Discussion on the CV, market turmoil, fear and oil prices.

Posted by The Wealthy Accountant on Saturday, April 4, 2020

 

Stimulus Checks for Individuals

A refundable tax credit is provided by the Act of $1,200 for individuals ($2,400 for joint returns). There is an additional $500 rebate for each child under age 17. 

There is a lot of confusion around who gets the recovery rebate and how much. 

  • First, Social Security recipients also get the rebate. The Treasury Department and the IRS got this wrong when they stated these people must file a tax return to get the rebate. The Act made it clear this was not required and after much drama the Treasury Department changed its positions; a tax return is not required.
  • Second, the rebate is not taxable income.
  • Third, the IRS will direct deposit the rebate into your bank account if you used direct deposit on your last tax return or Social Security check. Everyone else will get a check in the mail.
  • Fourth, direct deposit payments will begin the week of April 13th and continue until all who qualify get their payment. Checks will be mailed starting in mid-May and continue until all are issued. The IRS will use information from your 2019 tax return to determine if you qualify for a rebate (see details below). If you did not file your 2019 tax return, the IRS will use your 2018 return. If you file neither year, the IRS will issue the rebate once you file your 2019 return anytime during 2020. If you do not need to file a 2018 or 2019 return you can file a 2020 tax return where the rebate will be issued then if you qualify.
  • Fifth, the rebate is on the 2020 tax return to be filed in the Spring of 2021. The rebate is a refundable credit (you get the rebate even if you have no tax liability). If the IRS screws up and overpays you, you don’t have to pay back the over-payment. If the IRS underpays you, you get the remaining amount with your 2020 tax return.
  • Sixth, there is an issue involving children that might be rectified in a future bill from Congress. Children 17 and older and in college or school are still usually claimed on the parent’s return. The parent gets nothing (children under 17 are an additional $500 to the parent, $0 for those 17 and older) even if the child is in school or college, but if the child files their own return — and not claimed on the parent’s return — the child would get $1,200. There are several problems here. Technically, there are no dependents on a tax return since the TCJA. However, similar rules are still followed for education credits and the Child Tax Credit (CTC). It isn’t as simple as removing a child from the parent’s return. The child has to disclose on their return they are a Dependent of Another when they file. If the parent is providing more than 50% of their support the child cannot claim themselves. It is vital to review all the support rules. If your child provides more than half of her support they can claim themselves and probably qualify for a rebate. 
  • Seventh, if you owe back taxes you will still receive the rebate. The only exception to receiving the rebate is if you owe back child support. Back child support is first paid before any rebate is sent to you.

The rebate is based upon your adjusted gross income (AGI). Single taxpayers get the full $1,200 rebate up to an AGI of $75,000 ($112,500 for head of household; $150,000 AGI for joint filers) The rebate is reduced by $50 for every $1,000 of AGI above the threshold (the CARES Act actually says a 5% reduction for AGI above the threshold) until it is reduced to zero at $99,000 for single taxpayers without children ($198,000 for joint returns without children). The complete phaseout of the rebate is higher if you have a qualified child as the rebate is reduced $50 per $1,000 over the threshold, meaning you can have a higher AGI with children and still get a small rebate

Planning tip! While caution must be advised when it comes to not claiming a child in college when the child does not provide more than half of their own support, there is an opportunity for high incomers to plan their rebate.

If your income is over the phaseout level for 2019 — but not 2018 — it might be advantageous to wait until you get your rebate before filing your 2019 tax return. if the opposite is true (2019 income is under the threshold and 2018 is above) you want to file your 2019 tax return as soon as possible. The IRS will issue your rebate anytime during 2020 once a tax return is filed if one (2018 or 2019) was not previously filed or additional rebate is allowed. If both 2018 and 2019 are over the threshold you have one more chance to get the rebate. If your 2020 income is below the limit the unpaid rebate you qualify for will be added to the 2020 return.

Remember, if the IRS sends too much you do not have to repay it. 

Here is a calculator to estimate how much you can expect in your rebate check.

 

Tax Return and Estimated Payment Due Dates

This section is not in the CARES Act.

The Treasury Department extended tax season for 2019 tax returns until July 15, 2020. That means 2019 tax returns are now due July 15, 2020. Any balance due is due at that time without additional penalty or interest. Estimated tax payments are also due July 15th. That means the April 15th and June 15th estimated payments can be made as one lump-sum by July 15th without interest or penalty. 

 

Charitable Contributions

Prior to the TCJA the maximum deduction allowed for cash charitable contributions for individuals was limited to 50% of AGI. The TCJA increased this to 60%. The CARES Act increases this limit again to 100% for tax years beginning after December 31, 2019. In all cases, the excess charitable contribution is carried forward up to 5 years.

Corporations (regular corporations, not S corporations) move from 10% to 25% of taxable income as the deductible limit for charitable contributions, with the remainder carried forward up to 5 years.

The CARES Act also allows up to a $300 cash charitable contribution deduction above-the-line (if you do not itemize) for individuals. The $300 above-the-line deduction excludes donor advised funds.

 

Student Loans

Federal student loan interest and principle are suspended for 6 months, from March 16 through September 30, 2020. Private loans no not count! There are several exceptions. All Stafford loans, PLUS loans for educational costs (instead of for tuition), consolidation loans under FFEL and Perkins loans.

Suspended payments will not hurt your credit. Interest will not accrue during this time either. Automatic payments are cancelled. To make a payment anyway, it will need to be done manually. Payments during the suspended period are applied to already accrued interest first and then principle. If financially able, making student loan payments on federal loans will pay down the loan faster as interest is not accruing for 6 months.

There is also a provision for employers to pay up to $5,250 annually of an employee’s student loans tax-free. This provision applies to payments made from March 28, 2020 to December 31, 2021. This cap includes other employer provided educational assistance. This might be a powerful tool to reward employees for 2020 and 2021.

Note: Some of the student loan material came from sources I trusted mostly. However, I was unable to verify all the material. I will update soon when I can verify this information with certainty..

 

Unemployment Benefits

For those impacted by COVID-19, funding has been provided for unemployment benefits, even if you exhausted state unemployment benefits or normally do not qualify for state benefits (self-employed, excluded members of a small business, etc.) These benefits run from January 27, 2020 to December 31, 2020.

There is also an additional $600 per week for up to 4 months, along with state benefits. Once state benefits expire, an additional 13 weeks of unemployment benefits are funded by the federal government.

All unemployment benefits are managed through your state’s unemployment office. My office has heard from clients some states are not up to speed on this yet. It may take persistence to get all the benefits you qualify for.

 

Required Minimum Distribution

The required minimum distribution (RMD) are waived for 2020.

 

Retirement Plan Distributions

Retirement plan distributions prior to age 59 1/2 face a 10% penalty in addition to the income taxes on the income. The CARES Act allows individuals to take a distribution of up to $100,000 from a qualified plan without the 10% penalty. The income tax on the distribution is still subject to income tax, but can be paid 1/3 each year starting in 2020. If the distribution is coronavirus related the distribution can be repaid to an eligible retirement plan within three years to avoid the income tax on the distribution as well.

Some states also have an early retirement plan distribution penalty (i.e. Wisconsin). The state penalty usually reflects the federal penalty. However, each state may treat this differently. Many problems can exists if the state of your residence does not follow federal law. For example: Your state may subject distributions to income tax in the current year. Later repayments to a qualified plan might be treated as an excess contribution on the state level. It is vital you discuss these issues with a competent tax professional before using this provision of the CARES Act. There are many considerations from a state tax standpoint beyond the federal CARES Act.

 

SBA Economic Injury Disaster Loan Grants

Small businesses have many tools from the CARES Act to deal with financial problems stemming from the coronavirus. My office was inundated with calls about the $10,000 grant provided to all businesses. Actually, this is technically a loan grant that is forgiven and is not added to income when it is forgiven.

Clients calling about this are right. Most small businesses will qualify (I think). The question is: How long will it take for money to arrive? Your guess is as good as mine. I think it is a good idea for all businesses to file an online application found here

Will everyone who applies get $10,000? Probably not. But many, even most, probably will.

The $10,000 is really “up to” $10,000 and treated as an advance. So don’t start spending before the check arrives. It could be weeks or months before funds arrive.

 

Delayed Payment of Employment Taxes

Employers can delay payment of the employer’s portion of the Social Security payroll tax. This does not apply to the Medicare portion of the payroll tax. 

As a recap: Employees have 6.2% withheld from their wages up to the cap for that particular year. The employer forwards this to the government, along with another 6.2% as the employer’s share of the payroll tax. It is the employer’s portion only that can enjoy a delayed payment. All of the employer’s Social Security portion of the payroll tax from March 12, 2020 to January 1, 2021 can be delayed. Half (50%) is due December 31, 2021 and the remainder by December 31, 2022. 

Self-employed individuals can take advantage of the same delay of payment for 6.2% of their self-employment tax. 

Note: If you receive any loan forgiveness under the CARES Act, including the Payroll Protection Loan Program, you are not allowed to delay tax payments under this provision.

 

Forgivable SBA Loans

Now we come to the elephant in the room. These so-called forgivable loans are shrouded in concerns. Just as the Treasury Department changed the rules on if Social Security recipients must file a tax return, the department changed the rules at least once on the terms of these loans to small businesses

These SBA loans are handled through your financial institution. As of Friday (April 3, 2020) some banks opened for applications. Here is a sample application. Many smaller banks are not ready to accept application. Bank of America in an email to my office outlined their procedures: notably, you must have a lending and deposit history with the bank. I have heard other large banks are easier to work with. 

Applications will start being accepted April 10th for independent contractors and the self-employed.

Payroll Protection Program Loans (PPP) have many details. Rather than make this post any longer, I will refer you to an excellent article in the National Law Review. We will use the National Law Review article in the Facebook Live. The video will be inserted into this post at the conclusion of the event. (See the video above.)

You should also review the SBA page on the topic. 

Here a few highlights to consider. These loan are not guaranteed forgiven! Too many people calling my office think this is guaranteed free money. It isn’t There are many rules to follow before they will forgive the loan.

  • First, employers can receive up to $10 million for 2.5 months of average payroll expense, including health benefits.
  • Second, this is in addition to the $10,000 advance Economic Disaster Injury Loan. 
  • Third, it only applies to businesses with 500 or fewer employees.
  • Fourth, the portion of the loan not forgiven must be repaid over a term no longer than 10 years at an interest rate of 4% or less.
  • Fifth, the amount forgiven is limited to payroll, mortgage interest, rent, and utilities paid or incurred over the 8 week period beginning with the loan origination date.
  • Sixth, if you lay off employees or reduce wages between February 15, 2020 and June 30, 2020, the amount of the loan forgiven is reduced proportionally. 

You are strongly urged to speak with your lending institution you intend to secure funding through for this program. You will need to provide additional information when you apply for the loan. This program is not as easy as the Economic Injury Disaster Loan Grants application. 

 

Additional Resources

In addition to the National Law Review article linked above, I strongly recommend the following resources:

CARES Act Summary by Foley (Pay special attention to the Employee Retention Credit not covered in this post.)

SBA Bridge Loans

SBA Paycheck Protection Program

SBA Disaster Loan Applications

Ward and Smith Review

Text of H.R. 748 known as the CARES Act (Caution: As a bill works through Congress many ideas are floated. Only the bill that became law counts. News reports frequently discuss items that “might” be in the final law. Again, read the final bill that became law for an understanding of the provisions.)

 

Stay safe, kind readers.

 


 

 

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Keith Taxguy

40 Comments

  1. Kenneth on April 4, 2020 at 8:55 am

    Keith, you are a master at digesting large amounts of data and summarizing it in a way we, your dear readers, can understand! Thank you!
    Isn’t the reduction $5 per $100 of income over $75,000 individual or $150,000 joint? I know this works out the same as you mentioned $50 per $1,000 over, but this nuance might help some of your readers calculate exactly how much they will receive.

    • Keith Taxguy on April 4, 2020 at 9:30 am

      Kenneth, you have read some of the news reports. The actual text reads: The amount of the credit allowed by subsection (a) (determined without regard to this subsection and subsection (e)) shall be reduced (but not below zero) by 5 percent of so much of the taxpayer’s adjusted gross income as exceeds… (Sec. 6428(c))

      Some news reports used $5 for every $100 and some used $50 for every $1000. I lean toward the Treasury using $1,000 brackets when reducing the rebate. However, I could be wrong as we haven’t seen anything yet. They could do a straight 5% calculation. Ask me in 6 months (maybe sooner).

    • A Brooks on April 5, 2020 at 12:07 am

      Hi, I’ve been trying to research this, but no luck .
      Maybe you can help ..
      If i was on partial UE till 1/31/20… then was put on medical disability ( state not ss) for 3 months
      Am I eligible at all for $600?
      If we are still in this same situation when i get released from disability, am i allowed to file for UE until my job reopens ?
      Thanks
      Andrea Brooks

      • Keith Taxguy on April 5, 2020 at 6:56 am

        The Department of Labor will provide policies to your state’s unemployment office. You will need to call them for an answer. Warning: Most states are not up to speed on this yet. It may take a week or so before they have answers.

  2. JAMES W byRD on April 4, 2020 at 8:56 am

    Very good synopsis, most likely best I have seen

  3. harisch sood on April 4, 2020 at 9:10 am

    Great summary.

  4. Mike Carter on April 4, 2020 at 9:42 am

    Crushed it Keith! Lots of moving parts, trying to keep clients updated on the criteria seems to be a crapshoot. Thanks for bringing your summary to the table!

  5. Karen G on April 4, 2020 at 10:15 am

    Thank you Keith! You are very helpful in these trying times 🙂

  6. Jen Towkaniuk on April 4, 2020 at 10:29 am

    Thanks for making this complicated subject so clear! I had no idea about the back child support clause and I expect our family will finally receive the child support that has been owed to us for years. I’ll keep you posted!

  7. Dave on April 4, 2020 at 10:31 am

    There have been some updates to the PPP loan since your reading. The SBA page you link to provides the most up-to-date information.

    • Keith Taxguy on April 4, 2020 at 12:38 pm

      Dave, this is changing faster than I can keep up. That is why I linked to the SBA pages and others. Always verify. I will provide as up-to-date information as I can, but I don’t always see it real time.

  8. Matt on April 4, 2020 at 1:05 pm

    Great summary Keith! So the $10,000 is actually a loan for small businesses? Is there a negative for a small business taking this? Thanks

    • Keith Taxguy on April 4, 2020 at 2:52 pm

      None that I know of or can see, Matt. I also filed for the $10,000 loan grant for businesses.

  9. Justine on April 4, 2020 at 3:18 pm

    Is the $300 above the line charitable giving double to $600 for married filing jointly?

    • Keith Taxguy on April 4, 2020 at 5:06 pm

      We talked about that in the video, Justine. The text of the CARES Act is unclear on this. I read it as $300 per tax return, but you can easily read it as $300 per person. The IRS will have to provide guidance. It will be toward the end of the year (my guess) before this is resolved.

  10. Andy W on April 4, 2020 at 5:19 pm

    Super summary – thank you so much Keith!

    A question if I may – I’ve already filed my 2019 taxes – we are over the income limit to qualify for this rebate. We have a 23-year old son who we claimed as a dependent who does not live with us. He also filed his own tax return (under the income limits). After reading the detailed info on dependents, it appears to me that he does not actually qualify to be claimed as a dependent on my taxes. If I re-file mine (and his) taxes to reflect that he is NOT a dependent, is there a mechanism whereby he could receive the rebate based on the updated tax returns?

    • Keith Taxguy on April 4, 2020 at 7:33 pm

      You will need to amend both returns with the correct information. Federal amended returns must be paper filed. It will take forever for the amended returns to be processed. The rebate might be sent him later in the year. Or, you could do nothing and wait until the 2020 return is filed.

  11. Andy W on April 4, 2020 at 6:32 pm

    Great, clear article – thank you! I have a question please – we have already filed our 2019 taxes, and exceed the income limits to qualify for the rebate. We have a 23-year old son (who filed his own 2019 tax return, at less than the income limits) that we claimed as a dependent. After reading the detailed information you provided on dependents, it appears that we did not in fact meet the criteria to claim him. If we re-file both his and our tax returns, no longer claiming him as a dependent, is there a mechanism by which he would receive the rebate he would then be entitled to?

    Thanks so much.

  12. Andy Hough on April 4, 2020 at 6:34 pm

    According to this IRS only the April 15th estimated tax payments have an extended due date of July 15th. The June 15th payments are still due on June 15th. It doesn’t make a lot of sense for the April payments to be due after the June payments, but that is how it is currently. Question 16 at this page-https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers

    • Keith Taxguy on April 4, 2020 at 7:27 pm

      Andy, the IRS website has been terrible with accurate reporting so far. They also said Social Security recipients had to file a tax return when the law passed clearly indicated otherwise; then they reversed their position. It might be true the June 15th ES payment is due then, but that is not what the Treasury Department stated. Hopefully they clarify before June 15th.

  13. Matt on April 4, 2020 at 8:44 pm

    Thanks for the synopsis! My question is this (and I understand everything is still very fluid as they nail down the rules) – I have a W2 job but I also have a short term rental property business on the side (LLC, Schedule E, but qualifies for QBI in 2020). I have no employees for the business other than me, the owner. I filed an application for the EIDL today based on cancelled reservations due to the Emergency.

    Do you expect that my situation would qualify for the PPP as well?

    • Keith Taxguy on April 4, 2020 at 8:59 pm

      Matt, the PPP is for payroll so without employees it would not apply. However, there could be future legislation that would provide resources for income property owners. I say this because I cannot imagine the dislocation landlords are currently facing. Many tenants will never be able to catch up back rent regardless how soon this ends. Maybe there is a mortgage benefit, but that is unfair to landlords who paid off their properties. As Yoda said, The future is difficult with this one. I wish I could give a reasonable guess. But the appropriate answer is to say, I do not know. Because I don’t. I recommend watching future stimulus packages work through Congress because my gut tells me the economic disruption id greater than many expect.

  14. Dave on April 5, 2020 at 10:03 am

    Keith,
    My sister runs a small bakery / cafe, as an S-Corp, that has been struggling before Covid-19. As a result, she hasn’t been taking any W-2 for herself in a couple of years. She has approx. six, W2 employees. Is my sister eligible for any of the expanded unemployment benefits as part of the CARES Act? Under what conditions? I am trying to provide her with as much info as to how to navigate the waters in these challenging small business conditions.

    I expect that since she hasn’t been taking any W2, that she is not eligible for any unemployment but wanted to check with the expert.

    Thx,
    Dave

    • Keith Taxguy on April 5, 2020 at 10:26 am

      Dave, all unemployment issues are being handled by the local unemployment offices. The Department of Labor is working with each state’s unemployment office to properly handle the expanded unemployment issues. I know most states are still waiting for guidance. All I can suggest is that you continue working to contact them. It will take time for unemployment offices to work through the surge in unemployment requests. The Department of Labor will provide guidance to the states for handling unique situations, such as your sister’s.

  15. Tamithy Gamble on April 5, 2020 at 10:13 am

    If someone is owed back child support and the children are grown and the person is on disability now and released if child support when disability started how does it affect stimulus vovid payment

    • Keith Taxguy on April 5, 2020 at 10:28 am

      Tamithy, all we can do is wait and see how these special situations play out. The Cares Act only mentions child support as a reason for not getting the rebate. How that will be applied is anybody’s guess at this time.

  16. Shannon Reeves on April 5, 2020 at 10:14 am

    Hi Keith! Thank you for the guidance. An landlords who do not have an LLC but are losing rents due to laid off tenants able to apply for EIDL? If so do we select the Sole Proprietor/independent contractor/other selection in the SBA app? What do we put for Legal Business Name?

    Thanks !
    Shannon

    • Keith Taxguy on April 5, 2020 at 10:30 am

      Shannon, my understanding is landlords do qualify for the EIDL. Your business name is your name.

  17. Tamithy Gamble on April 5, 2020 at 10:17 am

    He case was dismissed through child support recovery when he went to court because he was disable now and on supplemental security income but he got behind here and there because he couldn’t work

  18. Pat on April 5, 2020 at 12:33 pm

    Hi,
    Thanks For all the great info! Can you help me clarify my situation? I am an independent contractor (receiving a 1099 from mainly one source for about 2000-2500.00 of mo. Income) teaching in a studio. We shut down for a week, obviously that was lost income. Then, we transition to a virtual schedule. However, with that in place, I am losing 2/3 of my usual hours as it is a greatly reduced schedule. Under the existing situation, what do you suggest I apply for?
    Thanks for any advice!

    • Keith Taxguy on April 5, 2020 at 12:58 pm

      Call the unemployment office in your state. They will handle all unemployment claims, including the expanded benefits under the CARES Act. Note: Many states are waiting for guidance from the Department of Labor so it might take a while to get through and receive your benefits.

  19. NewInvestor on April 5, 2020 at 1:50 pm

    I am thinking about taking advantage of penalty-free 401k withdrawal from the CARES Act. I am looking at it as an opportunity to get my money out and into similar equities. Is this a poor decision? I would essentially be moving the money from the 401k to a taxable investment account? What do you think..

    • Keith Taxguy on April 5, 2020 at 4:03 pm

      I hate it, NewInvestor! My guess is the 401(k) is in a broad-based mutual fund of some sort and you think you can outsmart the market. My career is filled with people who got bludgeoned thinking that way. Also, you end up paying tax sooner in a non-qualified account over the 401(k). You avoid the penalty, but you still pay income tax over the next few years for the withdrawal! Please reconsider.

      Finally, my good friend, Jim Collins, wrote what might be the best investing book to ever see print. Even Jack Bogle gave it a thumbs up as the best book to win at investing. It’s called The Simple Path to Wealth. Use the link to invest in a copy from Amazon. Read it. Then read it again. Then read it one more time. Every time you think of doing what you proposed, start reading your Jim Collins. You can thank me later.

  20. Kristen on April 7, 2020 at 8:40 am

    Thanks for breaking all this down! Extremely helpful and helped me get my money ducks in a row to prep what’s best for our situation.

  21. Michael Kennedy on April 7, 2020 at 7:50 pm

    You mentioned RMD do not have to be taken in 2020…does this include inherited IRA’s?

    • Keith Taxguy on April 8, 2020 at 10:11 am

      Michael, good question. It looks like the RMD for inherited retirements accounts are also waived for 2020. This means that the 5 year window to distribute inherited retirement funds are treated “without regard to calendar year 2020.. (CARES Act H.R. 748, Sec. 2203(a)(iii)(II))

      • Michael Kennedy on April 8, 2020 at 10:16 am

        Thanks so much for the response!

  22. Bill on April 10, 2020 at 3:16 pm

    What happens to the expenses used to get the PPP loan forgiven? Can we still deduct those same expenses on our returns in 2020? Can’t find an answer for this anywhere. Example, If I get a $100,000 loan, get it all forgiven by hiring everyone back, do I have to reduce wage expenses on my 2020 return by that $100,000?

    • Keith Taxguy on April 10, 2020 at 9:08 pm

      Bill, I’ve already had that question and also could not find an answer. My gut feeling is you can’t double dip: grant money (forgiven loan) and a tax deduction. But I could be wrong. My guess is the IRS will provide guidance by late summer or autumn. My advice: assume an adjustment to deductible business expenses on the forgiven amount of PPP loans.

  23. Bill on July 14, 2020 at 6:10 pm

    Hi Keith. I appreciate your write up. I am curious about the retirement distribution option. My wife did have COVID, so I know that we qualify. It doesn’t seem like there’s a “limit” besides the $100,000. The income can be distributed over 3 years, so it seems like (for me) a possible “low tax conversion option” of an otherwise somewhat illiquid account. You correctly pointed out concerns at the state level. My state is New York. I am a federal employee and would be withdrawing from a TSP. I am wondering if the TSP distribution can be subtracted from New York AGI entirely based on information below. I know you don’t practice in New York, but I’m curious if you have an opinion, or a referral on someone who could solidly answer me.

    New York has a federal, state, and local “pension” exclusion. Page 18 of the income tax form instructions references these pensions as “subtractions” from federal AGI (https://www.tax.ny.gov/pdf/current_forms/it/it201.pdf).

    Publication 36 – General Information for Senior Citizens and Retired Persons states “This subtraction modification is allowed regardless of the age of the taxpayer or of the form the payment(s) take. ” (https://www.tax.ny.gov/pdf/publications/income/pub36.pdf)

    There a couple of advisory opinions that exclude TSP distributions from NYS AGI without any limitation (as opposed to the $20,000 exclusion on IRA/non-public pension distributions for people age 59 1/2). In other words, they claim that as long as the TSP is funded by federal wages/matching contributions from the federal government (and not by private sector rollovers), they are federal “pensions” because they are funded with federal dollars.

    However, all of the advisory examples I see involve a retired individual, not an in service withdrawal, as I am aiming towards.

    Bureau of prisons employee taking entire balance in one lump sum from TSP upon retirement:
    We conclude that the lump sum distribution attributable to contributions made by Petitioner and his employer to his TSP account while he was a Federal employee will be exempt from New York State income tax if the amounts are included in Petitioner’s Federal adjusted gross income (FAGI). (https://www.tax.ny.gov/pdf/advisory_opinions/income/a17_1i.pdf)

    IRS employee planning to withdraw $30,000 a year from her TSP asking for an advisory opinion:
    Thus, we conclude that distributions to Petitioner from her TSP account that are attributable to Petitioner’s IRS wages or contributions to her TSP account made by her Federal employer and paid to her after her retirement (https://www.tax.ny.gov/pdf/advisory_opinions/income/a15_6i.pdf)

    Here’s an example of someone not “retired” who leaves state employment and receives his pension contributions (same federal, state, local exclusion) back, without NY state tax consequence:

    Example 2:
    A New York State employee leaves state service prior to vesting in the New York State Employee’s Retirement System. Contributions made by or on behalf of such employee, as well as all investment earnings accumulated thereon, are to be subtracted in determining such employee’s New York adjusted gross income. (https://govt.westlaw.com/nycrr/Document/I50e798c5cd1711dda432a117e6e0f345?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default))

    NY state tax law https://www.nysenate.gov/legislation/laws/TAX/612

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