Tax Update: 2019 End of Year Changes

On Friday December 20th the President signed into law the Consolidated Appropriations Act, 2020, which passed the House and Senate prior to the end of the legislative session. The bill, which averts a government shutdown also included a year-end tax package which includes various tax provisions, extenders and retirement plan changes (the “Secure Act”).

Tax Extenders:

Tax extenders are provisions which, historically, have only been extended two years at a time for both individuals and businesses. All of 2018 and nearly the entire 2019 year passed with out any action on these provisions. Here’s a highlight of some of the extenders included in this act.:

Individual Extenders:

  1. The exclusion of qualified principal residence indebtedness from gross income.
  2. The mortgage insurance premium deduction is now extended through 2020.
  3. The medical expenses deduction 7.5% floor has returned for 2019 and 2020 (opposed to the 10% floor).
  4. The above-the-line qualified tuition and related expenses deduction is back and has been extended through 2020.

Business Extenders:

  1. The employer credit for paid family and medical leave and the work opportunity credit were slated to expire in 2019 but have been re-upped through 2020.
  2. Numerous other extenders related to the recovery of expensing certain business investments targeted to specific industries.

Affordable Care Act Taxes

Included in the bill was the repeal of taxes related to the Affordable Care Act. Most notable of these are the excise tax on high cost employer sponsored health coverage, the so-called “Cadillac Tax”, and the medical devices tax, which imposed a 2.3% tax on the manufacture of pacemakers, hip implants and other similar devices.

Retirement Plan Changes (the “Secure Act”)

Major changes were enacted for retirement plans which were originally passed by the House in May.  A broad summary of the changes includes:

IRAs The start date for RMD (required minimum distributions) has been changed to the year in which the owner turns 72, ending the 70 ½ age limit for contributions to IRAs and shortening the distribution period for non-spouse inherited IRAs to 10 years. This change, shortening the distribution period, also applies to trusts which are named as IRA beneficiaries. Any trusts named as IRA beneficiaries should be reviewed and modified along with considering a change in beneficiaries to account for the shortened distribution period. The distributions, during the shortened 10-year period, can be made at any time so long as the entire account is distributed prior to the end of the tenth year. Taxpayers’ whose income fluctuates from year to year have an opportunity to reduce the tax paid on the inherited IRA with careful planning of distributions.  In addition, this rule allows an exception for an eligible designated beneficiary, which includes any beneficiary who is (i) the surviving spouse, (ii) a child under the age of majority (the 10-year rule would apply as of the date of majority), (iii) disabled or chronically ill, or (iv) no more than 10 years younger than the plan participant or IRA owner.

401(k)sRequiring plans to offer participation to long-term part-time employees, encouraging auto enrollment by increasing the cap, adding a new tax credit for small employers using auto-enrollment plans and streamlining the safe harbor for non-elective contributions.

Other changes include permitting qualified birth and adoption distributions that would be exempt from the early withdrawal penalty, making it easier for small employers to band together in multiple employer plans, and various changes to plan administration.

What’s missing?

An oversight previously left leasehold improvement property outside of the 15-year recovery period for depreciation purposes and therefore excluded the property from qualifying for 100% bonus depreciation. The hope was this glitch in the law would be corrected, but improvements still need to be recovered over 40 years instead of being eligible for expensing in the year incurred.

What was fixed?

The application of the estates and trusts tax rate for the “kiddie tax” has been reverted to the parent’s tax rate to correct the unintended consequence of increasing the tax on unearned income of children in low-income families. The act also eliminated the taxing of employee fringe benefits of C-corporations and tax-exempt entities in the same manner which unintentionally led church employees having to pay tax on reserved parking spaces.

In Conclusion

The changes which will have the impact on the greatest number of taxpayers’ income would be the start date of RMD (required minimum distributions) to 72 and the shortened distribution period for non-spouse inherited IRAs. As far as taxpayer deductions, those with the greatest impact include the increased deductibility of medical expenses, the reinstatement of the deduction for tuition and related expenses and deductibility of mortgage insurance premiums. If you have any questions regarding these changes in the tax law, please let us know.

The topics discussed in this article are complex, and we were not able to cover all of the specific details of this aspect of the tax law in this post. You should always consult your tax advisor about your specific situation and circumstances before making any tax planning decisions.