On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020 (the Act). The Act contains numerous tax provisions, including (1) extension of credits and deductions that had expired in prior years, as well as some that were scheduled to expire in 2019; (2) the repeal of Tax Cuts and Jobs Act of 2017 (TCJA) changes to the kiddie tax rules; (3) new disaster relief tax provisions; (4) the permanent repeal of the "Cadillac Tax" on high cost employer sponsored health insurance and two other healthcare taxes: (5) the expansion of Section 529 plans; and (6) major changes to some retirement related tax provisions. Changes of this bill may necessitate amended returns for 2018 and revisions to 2019 estimates.
Below you will find a few of the most impacted situations of this change:
- Reduction in Medical Expense Deduction Floor:For tax years beginning after 2018 and before 2021, the Act extends the provision in Code Sec, 213 which allows a taxpayer to deduct medical expenses to the extent they exceed 7.5 percent of the taxpayer's adjusted gross income (AGI) rather than the 10 percent of AGI that was scheduled to apply.
- Non-business Energy Property Credit: the non-business energy property credit under Code Sec. 25C is extended to property placed in service before 2021. This provision had expired on 12/31/2017 and has been extended retroactively.
- Modifications to Section 529 plans: First, the Act allows tax-free treatment applicable to distributions for higher education expenses to apply to expenses for fees, books, supplies and equipment required for the participation of a designed beneficiary in an apprenticeship program. The apprenticeship program must be registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act. Second, the act allows tax-free treatment to apply to distributions of certain amounts to make payments on principal or interest of qualified education loans. No individual may receive more than $10,000 of such distributions, in aggregate, over the course of an individual's lifetime. Third, the act contains special rule allowing amounts to be distributed to a sibling of a designated beneficiary (i.e., brother, sister, stepbrother or stepsister). This rule allows a 529 account holder to make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account.
- Penalty-Free Withdrawals from Retirement Plans for Individuals in Case of Birth of Child or Adoption: New Law. Under the Act, an exception to the 10-percent early withdrawal tax applies in the case of qualified birth or adoption distribution from an applicable eligible retirement plan. An applicable eligible retirement plan is an eligible retirement plan (as defined in Code Sec. 402(c)(8)(B)) other than a defined benefit plan. In addition, a qualified birth or adoption distribution may be re-contributed to an individual's applicable retirement plan, subject to certain requirements. A qualified birth or adoption is a distribution from an applicable retirement plan to an individual if made during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized. The maximum aggregate amount which may be treated as qualified birth or adoption distributions by an individual with respect to a birth or adoption is $5,000. The maximum aggregate amount applies to an individual basis. Therefore, each spouse separately may receive a maximum aggregate amount of $5,000 of qualified birth or adoption distributions( with respect to a birth or adoption) from applicable retirement plans in which each spouse participates or holds accounts. The provision applies to distributions made after December 31, 2019.
- Repeal of Maximum Age for Traditional IRA Contributions: The Act repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70 1/2 is repealed. The repeal on the prohibition on contributions applies to contributions made for tax years beginning after December 31, 2019.
- Increase in Age for Required Beginning Date for Mandatory Distributions: New Law, the Act changes the age on which the required beginning date for required minimum distributions is based, from the calendar year in which the employee or IRA owner attains 70 1/2 years to the calendar year in which the employee or IRA owner attains 72 years. Under the Act, the former rules continue to apply to employees and IRA owners who attain age 70 1/2 prior to January 1, 2020. The provision is effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 1/2 after December 31, 2019.
A practice tip: before making any changes to your retirement account and as to whether these topics apply to your specific situation it is always recommended to discuss with our firm or your financial representative for any potential impact.