December tax legislation
On December 20th, new tax legislation was enacted as part of the appropriations bill. In addition to disaster relief provisions, the bill has three major tax related components. First, it repeals the excise taxes on medical devices and so called “Cadillac” health plans. Both were instituted by the Affordable Care Act and have never gone into effect thanks to multiple suspensions. Second, some 30 plus tax deductions and credits which had either expired or were close to expiring, have been extended. And third, the bill includes the SECURE Act, a significant set of legislative changes related to IRAs and retirement plans. This writing covers selected provisions of the extender legislation and SECURE Act which we think are most important to our clients.
Extender legislation – Unless otherwise noted, the items below were extended through 2020. Note that some items were extended retroactively so that the filing of an amended return is necessary to benefit.
- Deduction for mortgage insurance premiums extended retroactively to 1/1/18.
- Exclusion from income for discharge of qualified principal residence debt.
- Medical expense deduction floor maintained at 7.5%.
- Deduction for qualified tuition and related expenses extended retroactively to 1/1/18. Note that this federal extension should result in Oregon allowing the tuition deduction for taxpayers who claimed an education credit in 2018, and we are awaiting guidance from the Department of Revenue on whether they will process amended returns claiming the deduction.
- Credit for nonbusiness energy property (residential) extended retroactively to 1/1/18.
- Deduction for energy efficient commercial buildings.
- Lots of credits related to alternative fuels and production of renewable electricity.
- Credit for fuel cell motor vehicles, alternative fuel refueling property, and 2-wheeled plug-in electric vehicles
- Employer tax credit for paid family and medical leave.
- Work opportunity tax credit.
In addition, the reduction of excise taxes for importers and producers of beer, wine, and distilled spirits is extended through 2020.
SECURE Act – Effective dates are noted.
- Contributions to a traditional IRA by an individual who has attained age 70½ are now permitted, effective for contributions made for the 2019 tax year. This seems simple enough but there is a sneaky provision in the law that interacts with a taxpayer’s “qualified charitable distribution” (QCD). A QCD refers to the provision which allows one who has reached age 70½ to transfer up to $100,000 directly from their traditional IRA to a charity without including any of the distribution in income. The new law reduces the amount excluded from income by the excess of (1) the total amount of IRA deductions allowed to the taxpayer for all years ending on or after the date the taxpayer attains age 70½, over (2) the total amount of such reductions for all prior years.
Example: Jennifer turned 72 years old in 2019 and is still working. She is excited to be able to contribute $6,500 to her traditional IRA for 2019, which she deducts on her 2019 return. She does the same for the years 2020 and 2021. In 2022, she decides to transfer $100,000 from her traditional IRA to her favorite charity under the QCD rules. Unfortunately, she’ll have to include $19,500 of the amount in income.
- The required minimum distribution (RMD) age is raised from 70½ to 72, effective for taxpayers who have not reached age 70½ by 12/31/19.
Example 1: Quinn turns 70 on March 1, 2019 and therefore turns age 70½ on September 1, 2019. Quinn is unaffected by the new law and must take his first RMD no later than April 1 of 2020.
Example 2: Quinn turns 70 on October 1, 2019 and therefore turns 72 on October 1, 2021. Because Quinn does not turn 70 ½ in 2019, he may take his first RMD as late as by April 1 of 2022. Under old law, he would have been required to take his first RMD by April 1 of 2021.
Example 3: Quinn turns 70 on June 1 of 2020 and therefore turns 72 on June 1 of 2022. Quinn must take his first RMD by April 1 of 2023. Under old law, he would have been required to take his first RMD by April 1, 2021.
Thus, depending on one’s age, the new law may defer one’s first RMD by 1 year, 2 years, or not at all.
- The so-called STRETCH IRA rules have been repealed, effective for employees or IRA owners who die after 12/31/19. (For some types of employer plans, the new rules are effective for employees who die after 12/31/21.) Under the new law, the remaining balance of a defined contribution plan or IRA must be distributed to the designated beneficiaries by the end of the tenth calendar year following the employee or IRA owner’s death. There are exceptions for surviving spouses, children who haven’t reached majority, chronically ill individuals, and other individuals who are not more than 10 years younger than the employee or IRA owner. Under the exception, the balance may be distributed over the life expectancy of the beneficiary.
- Distributions to repay student loans of beneficiary or sibling of beneficiary of up to $10,000 lifetime limit, can be made from section 529 plans, effective for distributions made after 12/31/18. Payments of both principal and interest are allowed.
- The Kiddie tax changes made by the Tax Cuts and Jobs Act of 2017, are repealed. The new law reverts to the pre-2018 law of taxing an affected child at their parents’ marginal tax rate rather than using the income tax rates for estates and trusts. While the change is effective for tax years beginning after 12/31/19, taxpayers can elect to apply the new law to 2018, 2019, or both. To benefit for 2018, an amended return must be filed.
- Penalty-free withdrawals of up to $5,000 can be made from IRAs and most retirement plans after 2019 for the birth or adoption of a child. In the case of a married couple, each spouse may receive $5,000 for a qualifying birth or adoption.
- A new credit is available to eligible employers for start-up costs related to new 401(k) and SIMPLE IRA plans which include automatic enrollment. The credit is allowable for the 3 year period beginning with the first year for which the employer plan includes an automatic contribution arrangement and maxes out at $500 per year.
- The credit for small employer retirement plan start-up costs is increased to as much as $5,000 effective for plan years beginning after 12/31/19. Under old law, the annual credit was limited to $500.
- 401(k) plans are required to allow certain long-term part-time employees to participate. Effective for plan years beginning after 12/31/20, employers must allow employees who have worked at least 500 hours per year for 3 consecutive years to participate in the plan, if at least 21 years old by the end of the 3 year period.
- Retirement plans adopted after the close of the tax year but before the extended due date of the employer’s return for the year, may be considered as having been adopted on the last day of the previous tax year. This is in contrast to prior law which required that a plan be adopted by the last day of the employer’s tax year. Effective for plan years beginning after 12/31/19.
There are many new plan administration provisions which we’ve not even touched on here. There’s no question that this tax bill will alter the retirement planning for many Americans for years to come. If you have any questions about the new law, please let us know.