Year-end Tax Law Changes
Congress is up to its old tricks. It seems the pols in DC love to wait all year and then right at the last possible moment, send new tax legislation down the pike!
This year is no different. As I write this, both the House and Senate have passed The Further Consolidated Appropriations Act of 2020. While this is mainly a federal government spending bill to keep the federal government open, it contains important tax provisions affecting individuals and businesses. It has been sent to the President’s desk, and short of some unexpected event, it will most assuredly be signed into law.
The major tax provisions contained in the bill can broadly be separated into two categories: Tax Extenders and the SECURE Act. As such, we’ll examine the changes in each.
For years now, certain provisions of the tax code have only been authorized in two year stretches. Various members of Congress occasionally vow to make these provisions permanent while others promise to get rid of them altogether. The impasse between the two sides leads to the provisions expiring, only to be raised again from the dead through extender legislation.
Such is the case again this year. Several important provisions expired at the end of 2017 but now have been resurrected again. But as in the past, they are only temporarily extended again, most through the year 2020.
Here are the major ones of interest:
- Medical expense deduction floor – medical expenses are an itemized deduction, but for years, they have only been deductible to the extent they exceeded a specified percentage of your adjusted grow income. For years, that percentage was 7.5%. Previous tax law changes had raised that to 10%. The Tax Cuts and Jobs Act of 2017 (TCJA) came along and reduced it back to 7.5%, but only for 2017and 2018, after which it was set to go up to 10% again. This act reduces the floor back to 7.5%, but only for two more years.
- Discharge of qualified principal residence debt – normally under tax law, the discharge or forgiveness of debt is considered taxable income. For a number of years, however, to provide relief for homeowners facing a decline in property value relative to what they owed on their mortgage, the discharge of "qualified principal residence indebtedness" was excluded from income. This treatment, which expired after 2018, is now extended.
- The popular mortgage insurance premium (or PMI) deduction, which allows someone whose income is below certain thresholds to deduct the cost of PMI purchased in connection with acquisition indebtedness on the taxpayer’s principal residence, has been extended. Of course, with TCJA so significantly expanding the standard deduction, the extension of this may be of limited benefit.
- Finally for individuals, the above-the-line deduction for qualified tuition and related expenses has also made a comeback, allowing a deduction for such expenses without having to itemize.
- Several tax credits have also been extended, including the new markets tax credit, the employer credit for paid family and medical leave, the work opportunity credit, and credit for health insurance costs of eligible individuals.
The SECURE Act
Back in 2019, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, but it was never enacted into law. This now becomes law under the bill. Among the many changes are:
- Increases the age after which required minimum distributions from certain retirement accounts must begin to 72 (from 70½);
- Modifies requirements for multiple-employer plans to make it easier for small businesses to offer such plans to their employees by allowing otherwise completely unrelated employers to join in the same plan;
- Allows penalty-free distributions from qualified retirement plans and IRAs for births and adoptions;
- Makes it easier for long-term, part-time employees to participate in elective deferrals;
- Allows certain home health care workers to contribute to a defined contribution plan or IRA;
- Requires nonspouse beneficiaries of IRAs and qualified plans to withdraw all money from inherited accounts within 10 years (with some exceptions); and
- Repeals the maximum age for IRA contributions, which was currently set at age 70½.
A provision of the bill that doesn’t fall neatly into the above categories is one that repeals the new "Kiddie Tax" provision that came into effect under TCJA (see my previous article from last summer entitled "The Revamping of the Kiddie Tax"). The TCJA provision was designed to simplify the Kiddie Tax, but had unintended consequences for some lower income taxpayers. By repealing it, we return to the old, but more complex, Kiddie Tax regime.
Of course, there are other changes in the bill, but these are the most commonly applicable in my view. And I’m sure we’ll discover more as we further unpack this new law!