Get Ready for More Tax and Retirement Changes
Repeals, Extenders, and Retirement Guidelines
By Baron Green
In the world of federal taxes, you can always count on change. In late December 2019, President Trump and Congress signed into effect the Consolidated Appropriations Act of 2020. This piece of legislation will have a significant impact on your 2019 tax situation. This new bill included several tax extenders as well as new retirement guidelines, known as the SECURE (Setting Every Community Up for Retirement Enhancement) Act.
The summary below provides you with some tips and an overview of some of the important points that may impact your income tax situation.
Extenders for Individual Taxpayers
Extenders are used to extend the life of a sunsetting piece of tax law. The appropriations bill reinstated several prior extenders that expired, making them effective retroactively for 2018 and 2019 and through 2020. Important extenders in the bill include:
- You will again be able to deduct your qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI). The AGI floor was reduced from 10%.
- Your mortgage insurance premiums are again allowed to be deducted as qualified residence interest.
- Reinstatement of the tuition and fees deduction as a deduction for adjusted gross income.
- If you have debt forgiven by a financial institution for your primary home, you can continue excluding the amount of forgiveness from your income for income tax purposes.
- Your 529 savings plan can be distributed tax-free for the payment of approved apprenticeship programs as well as for payment of up to $10,000 in qualified education loans.
Other Miscellaneous Credits Extended Through 2020 Include:
- Work Opportunity Tax Credit (WOTC),
- New Markets Tax Credit,
- Medical leave credit and credit for health insurance costs,
- Excise tax relief on beer and spirits,
- Bio-diesel credit, and
- 179D Commercial Buildings Energy-Efficiency Tax Deduction
The Appropriations Bill also presented the SECURE Act which implements several significant retirement changes. Of particular importance:
- You can now wait to start taking Required Minimum Distributions (RMD) until you reach age 72. You used to be required to take RMDs at age 70 ½.
- Prior to this legislation, you couldn’t contribute to your IRA if you were older than 70 ½. Now there’s no maximum age for contributions.
- “Stretch provisions” for IRA were eliminated. If you inherit a non-spouse IRA, it must be distributed within 10 years or less (if inherited from someone who died in 2020 or later).
- As an individual taxpayer, you can still take an IRA distribution for qualified charitable donations at age 70 ½.
- If you’re a long-term part-time employee, you may be eligible for participation in company 401(k) plans.
- Up to $5,000 can be withdrawn penalty-free from a retirement account for the birth or qualified adoption expenses of a child within a year. The amount is still taxable, but tax can be avoided if funds are redeposited within 60 days.
- Plan loans from a 401(k) through a credit card or similar arrangement are no longer allowed.
Other Notable Changes
- The “Kiddie Tax,” which taxes a child’s unearned income (i.e., interests, dividends, capital gains), is once again taxed at the parent’s rate instead of using the higher trust rates.
- Excise taxes on high-cost employer-sponsored health coverage were repealed.
- A new tax credit for small employers using auto-enrollment 401(k) plans was introduced.
- Several energy-related tax credits were reinstated including non-business energy property, qualified fuel cell vehicles (not electric vehicles), electric vehicle charging stations, and energy-efficient commercial buildings.
What did NOT make it?
Many were hoping for some additional fixes and extensions that did not make the cut. Among these changes that did not happen:
- The SALT cap deduction for state and local taxes as an itemized deduction remains at $10,000.
- Unreimbursed employee business expenses remain nondeductible as an itemized deduction.
- The tax credit for electric cars was not extended.
Since the bill itself is a grueling 1,770 pages, you can expect some changes in your tax and retirement situation – even if these changes don’t impact you immediately.
As always, if you have any questions or concerns regarding potential impacts on your tax situation, be sure to reach out to your Adams Brown advisor.