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Individual Tax Implications of the SECURE Act and Other Late 2019 Tax Changes

January 23, 2020
SECURE ACT

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law by President Trump on 12/20/2019 as part of the larger federal government spending bill. Designed to encourage retirement savings and make it easier for employers to offer retirement plans, the SECURE Act is the most impactful piece of retirement legislation of the past decade. The bill most notably:
  • Increases the age by which requirement minimum distributions (RMDs) must begin, from 70½ to 72, to account for increased life expectancies. This change only affects individuals who reach 70½ after 12/31/2019. Taxpayers who reached 70½ prior to 12/31/2019 are not affected.
  • Requires certain beneficiaries of IRAs and qualified plans to withdraw the balance of inherited accounts within 10 years of the owner’s death. Prior to the passage of the SECURE Act, beneficiaries had the option to stretch the distributions over their life expectancy. The repeal of the stretch option does not affect spousal beneficiaries, child beneficiaries who have not reached majority, chronically ill/disabled beneficiaries, or beneficiaries who are no more than ten years younger than the deceased owner. Nor does it affect beneficiaries whose RMDs started prior to 1/1/2020. The repeal of the stretch rule is expected to accelerate and increase the income tax due as funds will have to be withdrawn at a faster rate which may bump taxpayers into higher tax brackets.
  • Repeals the maximum age for traditional IRA contributions. Prior to the passage of the SECURE Act, a taxpayer was not permitted to contribute to a traditional IRA once he/she turned 70½. Beginning 1/1/2020, the bill allows taxpayers of any age to make a traditional IRA contribution. The requirement that taxpayers have earned income (wages, self-employment income) at least equal to the amount of the contribution remains unaffected.
  • Allows taxable non-tuition fellowship and stipend payments received by graduate and post-doctoral students to be treated as earned income for IRA contribution purposes. Effective 1/1/2020, this provision will allow affected taxpayers to begin saving earlier for retirement.
  • Allows certain home healthcare workers who receive tax-exempt difficulty-of-care payments to contribute to a qualified retirement plan or IRA. Being exempt from taxation, difficulty-of-care payments did not qualify as earned income prior to the passage of the SECURE Act, thereby making it impossible for these workers to contribute to a qualified retirement plan or IRA.
  • Allows for penalty-free distributions from qualified retirement plans and IRAs for births and adoptions. Starting 1/1/2020, an individual under the age of 59 ½ can withdraw up to $5,000 ($10,000 for a married couple) penalty-free for a qualified birth or adoption. The distribution is includible as income and taxed at ordinary rates but will not be subject to the 10% early withdrawal penalty.
  • Expands IRC Section 529 education savings plans to cover up to $10,000 in registered apprenticeship programs, qualified expenses, and principal and interest repayments for qualified student loans. This change is retroactive to 1/1/2019.
  • Repeals the kiddie tax rate structure instituted by the Tax Cuts Jobs Act (TCJA) in 2017. Under the TCJA, the unearned income of certain children was taxed according to the less favorable, compressed brackets applicable to trusts and estates. Effective 1/1/2020 (with the option to start retroactively in 2018 and/or 2019), the SECURE Act reverts to taxing the unearned income of a child subject to the kiddie tax at the parents’ tax rates if the parents’ tax rates are higher than the tax rates of the child.
EXTENDERS

The federal government spending bill also extends many expired tax provisions through 12/31/2020, including:
  • The exclusion from gross income of discharge of qualified principal residence indebtedness (retroactive to 1/1/2018)
  • The ability to deduct mortgage insurance premiums in connection with qualified residence acquisition indebtedness as deductible home mortgage interest (retroactive to 1/1/2018)
  • The medical expense deduction AGI floor is temporarily lowered from 10% to 7.5%
  • The qualified tuition and related expenses above-the-line deduction is reinstated
  • Various incentives for employment, economic growth, and energy production and efficiency 

A number of credits scheduled to expire at the end of 2019 were extended through 2020. These include:

  • The new markets tax credit
  • The employer credit for paid family and medical leave
  • The work opportunity tax credit
  • The non-business energy property credit
  • The energy-efficient homes credit
  • The credit for qualified fuel cell motor vehicles
  • The credit for health insurance costs of eligible individuals 

Additionally, the Section 179D(h) deduction for energy efficient commercial buildings was extended to allow deductions to property placed in service before 1/1/2021.

DISASTER RELIEF ACT OF 2019

The omnibus spending package also provides tax relief for taxpayers affected by disasters in 2018, 2019, and up to 30 days after the enactment of the bill. Eligible taxpayers can make penalty-free withdrawals from retirement plans to cover economic losses suffered by reason of a qualified disaster.

The bill also enacts an employee retention credit for eligible employers equal to 40% of qualified wages paid to employees during the time the business is not in operation as a result of a natural disaster.

Finally, the bill implements special rules for disaster-related personal casualty losses and for determining earned income for purposes of the earned income tax credit and introduces automatic 60-day filing extensions for certain taxpayers affected by federally declared disasters.

REPEAL OF PARKING FRINGE BENEFIT RULES FOR TAX-EXEMPT ORGANIZATIONS

Enacted by the TCJA, this provision required tax-exempt organizations which provided qualified transportation fringe benefits or parking to employees to pay unrelated business income tax (UBIT) on the amount of disallowed parking expenses. This provision is now repealed.

Understanding the implications of the recent tax legislation can be complicated but talking with your tax advisor should be easy. Contact your MarksNelson tax advisor today to better understand how the intricacies of the late 2019 tax changes may impact you.

About THE AUTHOR
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Florence Gormly is a tax supervisor at MarksNelson. 

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