By now you may have heard about The SECURE Act. As we continue to digest the impact of these new rules, we are seeing some new planning opportunities emerge for our clients. The most important rules changes involve how IRAs are passed to your heirs (or how you inherit IRA’s from your loved ones). Below is a wonderful summary of some of the recent tax law changes written by Eliot Bassin of Bregman & Co., an accounting firm located in Farmington, CT.
-Michael Lecours
As 2019 drew to a close, it appeared that the year would be an unremarkable one from the standpoint of federal income tax legislation. That was until long languishing tax legislation was attached to a year-end spending bill which needed to be passed in order to avoid a government shutdown. The Further Consolidated Appropriations Act (the “Act”) sped its way through the House of Representatives and the Senate and was signed into law by the President on December 20, 2019. The Act repealed three health care taxes that were originally enacted as part of the 2010 health care reform legislation, incorporated the text of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, extended several expired tax provisions, and changed the treatment of the unearned income of minors (also known as the “Kiddie Tax”) again!
The SECURE Act, which passed the House of Representatives in May but was never voted on by the Senate, represents one of the most sweeping changes to retirement legislation since the Employee Retirement Income Security Act was passed in 1974. Key provisions of the SECURE Act which were included in the Further Consolidated Appropriations Act include:
- Required Minimum Distribution Age – The age after which required minimum distributions from certain retirement accounts must begin was increased from 70 ½ to 72.
- Maximum Age for IRA Contributions Repealed – The maximum age of 70 ½ after which contributions to Individual Retirement Accounts was prohibited was repealed as long as the taxpayer or the taxpayer’s spouse (if married filing jointly) has earned income during the year.
- Penalty-Free Distributions – IRA owners and beneficiaries of certain qualified retirement plans may now take a penalty-free distribution of up to $5,000 after the birth or adoption of a child.
- Elimination of “Stretch” IRA – Previously, non-spouse designated beneficiaries of an IRA would be permitted to take required minimum distributions over their life expectancy. The Act eliminated the ability for most beneficiaries to “stretch” their distributions over their lifetime and generally requires that distributions be taken over a 10-year period. Note, there are no specific requirements from year-to-year; however, the total balance must be withdrawn by the end of the 10th year. This provision may also have far reaching implications for “look-through” trusts intended to function as the designated beneficiary of an IRA or qualified plan.
Division Q of the Act is referred to as the Taxpayer Certainty and Disaster Relief Act of 2019. This section contains many “extenders” for expiring tax benefits, including:
- Mortgage Debt Forgiveness – The Act extends the exclusion from federal income for discharge of qualified mortgage debt from a taxpayer’s primary residence. The exclusion is only available for the first $2 million of debt forgiven.
- Medical Expense Itemized Deduction – The Tax Cuts and Jobs Act (the “TCJA”) decreased the threshold for deducting qualified medical expenses in 2017 and 2018 from 10% of adjusted gross income to 7.5% of adjusted gross income. The Act extends the lower threshold through 2020.
- Tuition and Fees Deduction – The tuition-and-fees deduction, which may be claimed above-the-line in lieu of a higher education credit. The credit could be either $4,000 or $2,000, depending on MAGI, until the phase-out is complete.
- Work Opportunity Tax Credit – A business may be able to claim a Work Opportunity Tax Credit for hiring workers from certain disadvantaged groups.
- Family and Medical Leave Credit – The TCJA authorized a credit for employers providing paid family and medical leave to employees. This credit, which initially was created to last only through 2019, is based on wages paid for a maximum leave of 12 weeks. It ranges from 12.5% to 25% of the paid wages.
- Plug-In Vehicles – The Act provides a 10% credit, capped at $2,500 for highway-capable, two-wheeled plug-in electric vehicles.
The TCJA modified the taxation of the unearned income of children, requiring that the income be taxed at rates applicable to trusts and estates. The Act’s Kiddie Tax Amendment reverses this treatment and provides that such income shall be taxed at the parent’s marginal income tax rate. This change is generally effective for years beginning after December 31, 2019. However, a taxpayer may elect to retroactively apply the change to tax years beginning in 2018 and 2019.
Separately, the IRS issued Notice 2020-05 on December 31, 2019, which sets the standard mileage rates for 2020. The standard per mile rate for business use of an automobile decreased to 57.5₵ for 2020 from 58₵ for 2019. The medical mileage rate for 2020 is 17₵ per mile down from 20₵ in 2019. The charitable use mileage rate is 14₵ for 2019.
Note: If you wish to update your contact information, please reply to vmassi@bregman-cpa.com.
Very Truly Yours,
Bregman & Company P.C.
Certified Public Accountants