Once again, Congress has passed tax legislation just before Christmas. This year, the tax provisions were attached to an enormous spending bill. The tax portion contains two general areas of change – extending previous deductions/credits and new retirement plan changes.
The extension of previous deductions and credits are generally only extended for one year. Here are some of the more popular ones.
- The floor for deducting medical expenses as an itemized deduction is reduced from 10% to 7.5% through 2020.
- Treating mortgage insurance premiums as deductible qualified residence interest is revived and applicable through 2020.
- Deducting qualified tuition expenses, as an alternative to education credits, is restored and available through 2020.
- The New Markets tax credit is extended through 2020.
- A number of expired energy credits are also extended through 2020. Those include the nonbusiness energy property, qualified fuel cell vehicles, and energy efficient commercial buildings credits. All of these had previously expired.
- The credit for employers providing paid family and medical leave has likewise been extended through 2020.
The retirement plan changes were those contained in the Setting Every Community Up for Retirement Enhancement legislation (SECURE act).
The highlights from those changes are:
- The period for distributions from a decedent’s IRA is reduced from the life expectancy of the oldest named beneficiary to a period that is no longer than 10 years from the death of IRA owner – for decedents dying after December 31, 2019.
- However, the beginning date for taking required minimum distributions is deferred from the year the owner turns age 70 ½ to the year they reach age 72. Those who have already turned 70 ½ and have begun taking RMDs must continue, even if they have not yet attained age 72.
- Also, IRA owners who continue to work beyond age 70 ½ may now make contributions to their IRAs. This puts the traditional IRA contribution rules for older workers on a par with the employer retirement plan and Roth IRA rules.
- For 401(k) plans, the automatic enrollment safe harbor contribution percentage cap increases from 10% to 15% for 2020.
- 401(k) plans require that employers allow participation for employees with at least 500 hours per year, but less than 1,000 hours, after 3 consecutive years of service. This applies to plan years beginning after December 31, 2020.
- Employees may receive a distribution of up to $5,000, without imposition of any early withdrawal penalty, upon the birth or adoption of their child. This applies to distributions made after December 31, 2019.
- The age for commencement of required minimum distributions from qualified plans or IRAs is increased from 70 ½ to 72. This applies to distributions made after December 31, 2019, for those that are not already age 70 ½ by that date.
- Increases investment flexibility within employer plans by allowing the option of direct trustee-to-trustee transfers between employer plans or IRAs of lifetime income investments in the form of plan annuities.
- Allows small employers the ability to come together to offer 401(k) plan benefits to their employees via pooled multiple employer plans (MEPs), with reduced fiduciary liability concerns and less cost.
- Provides a new tax credit for small employers using auto-enrollment plans.
- Repeals the kiddie tax law change from TCJA, which reverts the kiddie tax on unearned income back to the higher of being taxed at their parents’ rate or their own rate. This provision is effective for tax years after 2019, but may elect to apply this change to 2018 and 2019 tax years.
- Eliminates the so-called “church parking tax” from TCJA. This effectively required church employees to pay tax on reserved parking spaces.
For additional details regarding these changes and what they may mean for you and your business, please contact us.
by Thomas R. Flood, Senior Tax Manager, CPA, MST, CFP, PFS