Highlights of spending package’s tax law changes
The federal government spending package titled the Further Consolidated Appropriations Act, 2020, does more than just fund the government. It extends certain income tax provisions that had already expired or that were due to expire at the end of 2019. The agreement on the spending package also includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act, as well as additional changes that are important to certain taxpayers.
Let’s look at some of the highlights.
Here are some of the most widely relevant breaks that have been extended through 2020:
- The exclusion from gross income of discharge of qualified principal residence indebtedness,
- The treatment of mortgage insurance premiums as qualified residence interest for itemized deduction purposes,
- The reduction in the medical expense itemized deduction floor to 7.5% of adjusted gross income,
- The above-the-line deduction for qualified tuition and related expenses,
- The deduction for energy efficiency improvements to commercial buildings (179D),
- Empowerment zone tax incentives,
- The credit for purchases of nonbusiness energy property,
- The credit for construction or manufacture of new energy-efficient homes,
- The New Markets credit,
- The employer tax credit for paid family and medical leave, and
- The Work Opportunity credit.
Some of these extensions might open up year-end tax planning opportunities if you can act before December 31. And the extension of some breaks that had expired at the end of 2017 but that now have been retroactively revived means that some taxpayers should consider filing amended returns for 2018.
The SECURE Act is primarily intended to encourage saving for retirement, though it’s not entirely favorable to taxpayers. Most provisions take effect January 1, 2020. Here are some of the most significant provisions:
- Elimination of the age 70½ limit for making traditional IRA contributions, so that anyone can contribute as long as they’re working, matching the existing rules for 401(k) plans and Roth IRAs,
- Increase of the age at which taxpayers must begin to take required minimum distributions (RMDs) from 70½ to 72,
- An exemption from the 10% tax penalty on early retirement account withdrawals of up to $5,000 within one year of the birth of a child or an adoption becoming final,
- Elimination (with limited exceptions) of the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies,
- Expansion of access to open multiple employer plans (MEPs), which give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties,
- Elimination of employers’ potential liability when it comes to selecting appropriate annuity plans, and
- A new requirement that employers allow participation in their retirement plans by part-time employees who’ve worked at least 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours.
- 529 Plans – Distributions made after December 31, 2018 may be used to cover costs associated with registered apprenticeships and up to $10,000 of qualified student loan repayments.
- The Appropriations Act contains two provisions that pull back changes made by the 2017 Tax Cuts and Jobs Act:
- The Act repeals new TCJA “kiddie tax” rules that applied the tax brackets for trusts to unearned income of certain children. Instead, old “kiddie tax” rules will apply (taxing the income at the higher of the parents’ tax rate or the child’s tax rate). The change is effective for 2020 tax returns but may also be applied to 2018 and/or 2019 returns if elected.
- The Act repeals a TCJA rule that subjected tax-exempt organizations to a tax on expenses incurred for employee parking and certain other qualified transportation fringe benefits.
- The Appropriations Act repealed 3 taxes from the Affordable Care Act that would have affected medical devices, employer-provided health insurance, and health insurance providers.
This is just a brief overview of some of the most relevant provisions. Contact your Hertzbach tax advisor to learn more about these and other changes that may affect you.