The federal government spending package, titled the Further Consolidated Appropriations Act, 2020, does more than just fund the government. It extends over 30 income tax provisions that had already expired or were due to expire at the end of 2019. The agreement on the spending package also includes the Taxpayer Certainty and Disaster Tax Relief Act (“Disaster Act”) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
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 – as part of the efforts to revive the housing market, Congress passed a law allowing a tax deduction for the cost of premiums for mortgage insurance (PMI) for homes and vacation homes. Under the law, PMI payments were lumped together with deductible home mortgage interest on Schedule A. The provision was renewed retroactively for 2017 and will now be extended to 2020;
- 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 New Market Tax Credit program and empowerment zone tax incentives have been extended through 2020;
- The employer tax credit for paid family and medical leave has been reinstated for another year; and
- The Work Opportunity Tax Credit (WOTC) will be extended through 2020, continuing to give employers an incentive to hire disadvantaged employees.
- Retroactive reinstatement of energy efficient improvement first year deductions under IRC 179D. This provision allows for up to $1.80 per square foot deduction for energy efficient building envelope, mechanical and lighting improvements placed into service before January 1, 2021.
- Energy efficiency credits for certain nonbusiness property.
- Expansion of qualified expenses for purposes of 529 account rules to include post 2018 costs for “registered apprenticeships” and up to $10,000 of qualified student loan repayments.
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 “Taxpayer Certainty and Disaster Tax Relief Act of 2019″ Disaster Act provides relief for taxpayers affected by disasters in 2018 through January 19, 2020. A few items to note regarding the Disaster Act include:
- Automatic 60-day extension for any tax filing for taxpayers in federally declared disaster area.
- Repeal of medical devices (2.3% gross receipts) tax for sales occurring after 12/31/19.
- Repeal of high cost “Cadillac” plan tax.
- The provision clarifies the private foundation excise tax on investment income. A 1.39% tax would replace the current two-tiered tax and is effective for tax years beginning after the date of enactment of the Act (January 1, 2020).
Congress repealed a section of the 2017 tax law that required associations and other tax-exempt organizations to pay a 21 percent unrelated business income tax (UBIT) on employee benefits, such as parking and transportation. As Associations Now reports, Congress recognized that nonprofit employee benefits like parking and transit assistance are not a trade or business conducted for the production of income and therefore should not be regarded as taxable under the UBIT statute.
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:
- Increased auto enrollment safe harbor cap from 10% to 15% for plans that adopt an auto enrollment feature which helps employers mitigate the impact of the “ADP” test.
- Certain plan elections for “non-elective” safe harbor adoption may now be made within 30 days of plan year end. A “non-elective” safe harbor plan design requires a non-election 3% contribution based on eligible compensation. This is one of two safe harbor 401(k) plan designs.
- Increased credit limit for small employer pension plan startup costs (up to $5,000).
- Small Employer Automatic Enrollment Credit up to $500 per employee for new 704(d) plans and SIMPLE IRA plans.
- 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 of the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies. With limited exceptions, non-spouse beneficiaries now have 10 years to distribute inherited retirement account balances. Spousal beneficiaries may continue to roll account balances from spouses into their own accounts and use the uniform lifetime table for distribution purposes.
- 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.
- Qualified plans adopted before the due date (including extensions) are now treated as having been adopted on the last day of the plan year. This new rule may allow for employer contributions but would otherwise not allow employees to make additional deferrals after the end of the year.
This is just a brief overview of some of the most relevant provisions. Contact a member of Smith and Howard’s Tax Group to learn more about these and other changes that may affect you.