Congress Reinstates Expired Tax Provisions
Congress let many tax provisions expire on December 31, 2017, making them dead for your already-filed 2018 tax returns.
In what has become a much too common practice, Congress resurrected the dead provisions retroactively to January 1, 2018. That’s good news. The bad news is that if you have any of these deductions, you have to amend your tax returns to make this work for you.
And you can relax when filing your 2019 and 2020 tax returns because lawmakers extended the “extender” tax laws for both years. Thus, no worries until 2021—and even longer for a few extenders that received special treatment.
Back from the Dead
The big five tax breaks that most likely impact your Form 1040 are as follows:
1. Exclusion from income for cancellation of acquisition debt on your principal residence (up to $2 million)
2. Deduction for mortgage insurance premiums (PMI) as residence interest
3. 7.5% floor to deduct medical expenses (instead of 10 percent)
4. Above-the-line tuition and fees deduction
5. Non-business energy property credit for energy-efficient improvements to your residence
Congress extended these five tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020, so you’re good for both 2019 and 2020. Can you take advantage of any of those?
Other Provisions Revived
Congress also extended the following tax breaks retroactively to January 1, 2018, and they now expire on December 31, 2020 (unless otherwise noted):
Tax-Saving Tips
• Black lung disability trust fund tax
• Indian employment credit
• Railroad track maintenance credit (December 31, 2022)
• Mine rescue team training credit
• Certain racehorses as three-year depreciable property
• Seven-year recovery period for motorsports entertainment complexes
• Accelerated depreciation for business property on Indian reservations
• Expensing rules for certain film, television, and theater productions
• Empowerment zone tax incentives • American Samoa economic development credit
• Biodiesel and renewable diesel credit (December 31, 2022)
• Second-generation biofuel producer credit
• Qualified fuel-cell motor vehicles
• Alternative fuel-refueling property credit
• Two-wheeled plug-in electric vehicle credit (December 31, 2021)
• Credit for electricity produced from specific renewable resources
• Production credit for Indian coal facilities
• Energy-efficient homes credit
• Special depreciation allowance for second-generation biofuel plant property • Energy-efficient commercial buildings deduction
Temporary Provisions Extended
Congress originally scheduled these provisions to end in 2019 and has now extended them through 2020:
• New markets tax credit
• Paid family and medical leave credit
• Work opportunity credit
• Beer, wine, and distilled spirits reductions in certain excise taxes
• Look-through rule for certain controlled foreign corporations
• Health insurance coverage credit
Eight Changes in the SECURE Act You Need to Know
As has become usual practice, Congress passed some meaningful tax legislation as it recessed for the holidays. In one of the new meaningful laws, enacted on December 20, you will find the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).
The SECURE Act made many changes to how you save money for your retirement, how you use your money in retirement, and how you can better use your Section 529 plans. Whether you are age 35 or age 75, these changes affect you.
Here are eight of the changes.
1. Small-Employer Automatic Contribution Tax Credit
If your business has a 401(k) plan or a SIMPLE (Savings Incentive Match Plan for Employees) plan that covers 100 or fewer employees and it implements an automatic contribution arrangement for employees, either you or it qualifies for a $500 tax credit each year for three years, beginning with the first year of such automatic contribution.
This change is effective for tax years beginning after December 31, 2019.
Tax tip. This credit can apply to both newly created and existing retirement plans.
2. IRA Contributions for Graduate and Postdoctoral Students
Before the SECURE Act, certain taxable stipends and non-tuition fellowship payments received by graduate and postdoctoral students were included in taxable income but not treated as compensation for IRA purposes. Thus, the monies received did not count as compensation that would enable IRA contributions.
The SECURE Act removed the “compensation” obstacle. The new law states: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”
The change enables these students to begin saving for retirement and accumulating tax-favored retirement savings, if they have any funds available (remember, these are students). This change applies to tax years beginning after December 31, 2019.
Tax tip. If your child pays no income tax or pays tax at the 10 or 12 percent rate, consider contributing to a Roth IRA instead of a traditional IRA. And frankly – no matter what tax bracket you are in, I’d seriously consider a ROTH IRA, 401K, TSP, etc. INSTEAD OF a traditional IRA or 401K, TSP, TSP, etc!
3. No Age Limit on Traditional IRA Contributions
Prior law stopped you from contributing funds to a traditional IRA if you were age 70 1/2 or older. Now you can make a traditional IRA contribution at any age, just as you could and still can with a Roth IRA.
This change applies to contributions made for tax years beginning after December 31, 2019.
4. No 10 Percent Penalty for Birth/Adoption Withdrawals
You pay no 10 percent early withdrawal penalty on IRA or qualified retirement plan distributions if the distribution is a “qualified birth or adoption distribution.” The maximum penalty-free distribution is $5,000 per individual per birth or adoption. For this purpose, a qualified plan does not include a defined benefit plan.
This change applies to distributions made after December 31, 2019.
Tax tip. A birth or adoption in 2019 can signal the start of the one year, allowing qualified birth and adoption distributions as soon as January 1, 2020.
5. RMDs Start at Age 72 (not 70.5)
Before the SECURE Act, you generally had to start taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan in the tax year you turned age 70 1/2. Now you can wait until the tax year you turn age 72.
This change applies to RMDs after December 31, 2019, if you turn age 70 1/2 after December 31, 2019 (that is only individuals born after June 30, 1949). So, if you turn 70.5 in 2020 (or later) you can wait until you turn 72 to begin RMDs. If you took an RMD in 2019, you’ll have to continue even if you aren’t age 72 yet.
*** The law has NOT changed for individuals over 70.5 owning traditional IRAs who use Qualified Charitable Distributions (QCDs) to fulfill their traditional IRA RMDs. QCD’s can still be performed at age 70.5. All charitably-minded (even tithing) retirees taking RMDs should consider this tax strategy!
6. Open a Retirement Plan Later
Under the SECURE Act, if you adopt a stock bonus, pension, profit-sharing, or annuity plan after the close of a tax year but before your tax return due date plus extensions, you can elect to treat the plan as if you adopted it on the last day of the tax year.
Under prior law, you had to establish the plan before the end of the tax year to make contributions for that tax year. This change applies to plans adopted for tax years beginning after December 31, 2019.
How it works. You can establish and fund, for example, an individual 401(k) for a Schedule C business as late as October 15, 2021, and have the 401(k) in place for 2020.
7. Expanded Tax-Free Section 529 Plan Distributions
Distributions from your child’s Section 529 college savings plan are non-taxable if the amounts distributed are
• investments into the plan (your basis), or
• used for qualified higher education expenses.
Qualified higher-education expenses now include
• fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act, and
• principal or interest payments on any qualified education loan of the designated beneficiary or his or her siblings.
If you rely on the student loan provision to make tax-free Section 529 plan distributions,
• there is a $10,000 maximum per individual loan holder, AND
• the loan holder reduces his or her student loan interest deduction by the distributions, but not below $0.
This change applies to distributions made after December 31, 2018 (not a typo — see below).
Tax tip. Did you notice the 2018 above? Good news. You can use the new qualified expense categories to identify tax-free Section 529 distributions that are retroactive to 2019.
8. New Rules on RMDs on Inherited Retirement Accounts
Under the old rules for inherited retirement accounts, you could “stretch” out the account and take RMDs each year to deplete the account over many years.
Now, if you inherit a defined contribution plan or an IRA, you must fully distribute the balances of these plans by the end of the 10th calendar year following the year of death. There is no longer a requirement to take out a certain amount each year.
The current stretch rules, and not the new 10-year period, continue to apply to a designated beneficiary who is
• a surviving spouse, • a child who has not reached the age of majority,
• disabled as defined in Code Section 72(m)(7), • a chronically ill individual as defined in Code Section 7702B(e)(2) with modification, or • not more than 10 years younger than the deceased.
This change applies to distributions for plan owners who die after December 31, 2019.
Kiddie Tax Changes
In December 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA) and changed how your children calculate their tax on their investment-type income. The TCJA changes led to much higher tax bills for many children.
On December 19, 2019, Congress passed a bill that the president signed into law on December 20, 2019 (Pub. L. 116-94). The new law repeals the kiddie tax changes from the TCJA and takes you back to the old kiddie tax rules, even retroactively if you so desire.
Kiddie Tax Basics
When your children are subject to the kiddie tax, it forces them to pay taxes at a higher rate than the rate they would usually pay.
• Here’s the key: the kiddie tax does not apply to all of a child’s income, only to his or her “unearned” income, which means income from dividends, rent, capital gains, interest, S corporation distributions, and any type of income… other than compensation for work (earned income).
For 2019, your child pays the kiddie tax only on unearned income above $2,100. For example, if your child has $3,000 of unearned income, only $900 is subject to the extra taxes.
Who Pays the Kiddie Tax?
The kiddie tax applies to children with more than $2,100 of unearned income when the children
• have to file a tax return,
• do not file a joint tax return,
• have at least one living parent at the end of the year,
• are under age 18 at the end of the year,are age 18 at the end of the year and did not have earned income that was more than half of their support, or
• are full-time students over age 18 and under age 24 at the end of the year who did not have earned income that was more than half of their support.
Calculating the Kiddie Tax
Under the TCJA, now valid only for tax years 2018 and 2019, any income subject to the kiddie tax is taxed at estate and trust tax rates, which reach a monstrous 37 percent with only $12,070 of income in tax year 2019.
Under the old rules before the TCJA, your child paid tax at your tax rate on income subject to the kiddie tax.
Kiddie Tax Choices
The SECURE Act, which the president signed into law on December 20, 2019, repeals the TCJA kiddie tax rules for tax years 2020 and forward and returns the tax calculation to the pre-TCJA calculation that uses your tax rate.
The new law also gives you the option to calculate the kiddie tax using your tax rate for tax years 2018, 2019, or both—it is your choice.
That’s all for this month… Mark