While many people were busy with the holidays preparations, on December 20th President Trump signed into law the Further Consolidated Appropriations Act (H.R. 1865), which included several bills. The 715 pages included two major tax bills – the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) and the Taxpayer Certainty and Disaster Tax Relief Act (the “Disaster Act”, for short) of 2019.
The Disaster Act
Note that these provisions are retroactive to the 2018 tax returns, so you should consider if you could have taken advantage of this rule. If so, amended returns should be considered. These provisions are retroactive for 2018 through 30 days after enactment (which would be 1/19/2020).
- The Act removes the 10% of AGI requirement for the deduction of disaster casualty losses. Most clients with 2018 disaster losses will find that this rule change will increase their deduction.
- The Act removes the requirement that taxpayers itemize to get any disaster loss deduction. It is not clear how exactly this will work since this concept does not currently exist in the Revenue Code.
- The Act creates an automatic 60-day filing extension for individuals with a principal residence in a disaster area, or a principal place of business in a disaster area.
- The Act creates a new exception to the 10% premature retirement distribution penalty under Section 72(t) for up to $100,000 (cumulative limit) for Qualified Disaster Distributions.
- These are exempt from the mandatory withholding rules.
- These are still subject to income tax but are treated as distributed evenly over a 3-year period (unless the taxpayer elects to report as income in full in the year of distribution).
- This distribution can be repaid within 3 years of receipt.
- This is another concept that is brand new, so some additional guidance will be needed here.
- The Act allows for the re-contribution of retirement distributions to be used for home purchases when the purchase was canceled by an eligible disaster.
- The Act increases the maximum plan loans for disaster recovery from $50,000 to $100,000, and delays repayments for up to one year.
- The Act creates a credit for 40% of wages (maximum of $6,000 wages per employee) paid in 2018 and 2019 paid by a disaster-affected employer to an employee from a core disaster area. Obviously, much explanation and many definitions will be required here.
The Secure Act
The core intent of this Act is to update retirement rules for needed improvements and longer life expectancies. Most of these provisions begin in the year 2020.
- The so-called “Stretch IRA” plan is eliminated for those dying after 2019. Beginning in 2020, IRA beneficiaries must spend the entire account within ten years of the death of the prior owner. Exceptions will remain for certain beneficiaries including spouses, those beneficiaries who are within 10 years of age of the deceased, those beneficiaries who are disabled or chronically ill, and minor children (but only while they are minors – then the 10-year clock will start).
- The Act removes the age 70-1/2 limit on contributing to an IRA. Beginning in 2020, no age limits will apply. All other requirements still apply, such as the requirements to have earned income.
- The Act creates a new exception from the 10% penalty for premature retirement distributions. This new one is for up to $5,000 for a birth or adoption. The distribution will still be subject to income tax – it’s just the 10% penalty that is waived.
- The Act increases an employer tax credit for the establishment of a retirement plan to up to $5,000.
- The Act creates a new employer tax credit for adopting an automatic enrollment retirement plan.
- The Act requires that long-term part-time workers be included as eligible employees (those who work at least 500 hours for at least 3 consecutive years).
- Non-retirement provisions of the SECURE Act.
- Retroactive to 1/1/2019, up to $10,000 annually of 529 plan funds can be used to pay expenses of student loans and apprenticeships.
- Before 2018, children with significant investment income were subject to the so-called “kiddie tax”, meaning that the children were taxed at their parents’ tax bracket. The Tax Cuts and Jobs Act of 2017 changed this rule effective for 2018, providing that these children will use trust tax rates instead. The Act changes this rule back effective for the tax year 2020. Thus, beginning in 2020, the children are not subject to trust tax rates, but to the incremental rate of their parents.
- Further, taxpayers can elect to apply this new rule to 2019.
- Even further, the taxpayer can elect to apply this new rule to 2018 via an amended return. But it seems that it may be hard to generate sufficient tax savings to justify the expense of this effort.
These are existing provisions that had expired or were going to expire. The rules here are not new – only the effective date.
- Previously expired on 12/31/2017 – now extended through 12/31/2020.
- Extends the exclusion of income from up to $2 million discharge of debt from the principal residence.
- Extends that mortgage insurance is deductible as home mortgage interest.
- Extends the deduction of qualified tuition.
- Extends the cumulative credit of up to $500 for nonbusiness energy improvements (home windows, storm doors, etc.). Many of our clients have used this $500 already, and since it is cumulative, that means that this is no longer available to them.
- Extends the credit of 10% for 2-wheeled plug-in electric vehicles.
- Previously expired on 12/31/2018 – now extended through 12/31/2020.
- Extends the 2018 treatment of medical expenses, which means that they are deductible to the extent that they exceed 7.5% of AGI, not 10% as scheduled.
- Previously expires on 12/31/2019 – now extended through 12/31/2020.
- Work Opportunity Tax Credit. This credit applies to the hiring and retention of certain groups of employees, including veterans, ex-felons, and high-risk youth.
- The Act repeals the so-called “parking tax” for nonprofit taxpayers ONLY, retroactively to 12/31/2017. This tax remains for other taxpayers.
- The Act repeals the ACA provisions for the 2.3% tax on medical devices and the so-called “Cadillac” tax on high-cost health insurance arrangements. These provisions had never taken effect.
Remember, you can amend your 2018 return if these changes make a significant difference for you. But if the affect is minor, don’t. Expect these amended returns to take many months to process, since the IRS will be flooded.