24 Dec The New U.S. Government Spending Bill: 10 Tax Changes for 2020
On December 20, 2019, President Trump signed the Consolidated Appropriations Act, 2020 into law. While this is essentially a government-spending bill for the year 2020, among the 700+ pages of this bill are various changes that may affect your taxes. This includes the SECURE Act, which primarily changes the way many retirement plans are administered. Here are the 10 changes that may have the most significant impact on our clients:
- Required Minimum Distribution (RMD): RMDs from retirement accounts now begin after age 72 rather than 70 ½. This change applies to taxpayers who have not yet turned 70 ½ by December 31, 2019.
- Traditional IRA contributions: You can now continue to contribute to traditional IRAs after retirement age as long as you have earned income. Under the old law, you could no longer contribute after age 70 ½. This applies to contributions made for taxable years beginning after December 31, 2019.
- Earned Income for IRA Deduction: Fellowship income is now considered as earned income for the purposes of allowing a deduction for traditional IRA contributions. This applies to tax years after December 31, 2019. Please note that if you exclude your foreign earned income, you may not have sufficient earned income to make a deductible traditional IRA contribution.
- Inherited IRA: Most non-spouse IRA beneficiaries must withdraw from an inherited IRA within 10 years of the owner’s death. Spouse beneficiaries can continue to roll it into their own IRA or take the distributions over their own life expectancy. Under the old law, even non-spouse beneficiaries were able to take the RMDs over their own life expectancy. This change applies to IRAs inherited after December 31, 2019. This rule does not apply to the surviving spouse, minor children, a chronically ill individual, or an individual who is not more than 10 years younger than the deceased. In the case of a minor child, they will need to distribute within 10 years of reaching majority age.
- Early Withdrawal Penalties: The new law adds an additional exception to the early IRA withdrawal penalty for taxpayers who gave birth or adopted a child. Early withdrawal refers to withdrawing before age 59 ½. This exception applies to up to $5,000 of distributions for the one-year period after birth or legal adoption. The taxpayer will need to include the child’s TIN (Taxpayer Identification Number) on their tax return. These distributions can also still qualify as an RMD. This applies to distributions made after December 31, 2019. This is in addition to the existing exceptions of early distributions for qualified higher education expenses, qualifying acquisition costs of a principal residence and unreimbursed medical expenses.
- 529 Plans: Taxpayers can now make tax-free distributions of up to $10,000 from a 529 plan to repay qualified student loans either for themselves or their siblings. The distributions, which are treated as qualified higher education expenses, will reduce the amount of the student loan interest deduction allowed. The $10,000 limit is a lifetime limit, and it is per sibling, not per beneficiary. These changes apply to distributions made after December 31, 2018.
- Kiddie Tax: The changes to the Kiddie tax made by the Tax Cuts & Jobs Act (TCJA) have been repealed, so we are back to the old rules. Under the TCJA, children with unearned income were taxed at the estate and trust rates. We are now reverting to the pre-TCJA rules of taxing these children at their parents’ tax rate. This change goes into effect for tax years after December 31, 2019. However, a taxpayer can elect to apply this change for their 2018 and 2019 tax returns. The new rules had been beneficial for parents taxed at the highest tax rates, but they were a huge hit to parents in the lower tax brackets. We will also have to go back to filing the parents’ return before filing the child’s return.
- Tuition Deduction: This expired at the end of 2017, but is back in effect through 2020. This deduction is available even to taxpayers who take the standard deduction. You may amend your 2018 return to claim this deduction.
- Mortgage Insurance Premium Deduction: This also expired at the end of 2017 but is back in effect through 2020. This deduction is only available if you take the itemized deduction. You may amend your 2018 return to claim this deduction.
- Medical Expense Deduction: The floor for taking medical expenses as an itemized deduction is back up to 10 percent of AGI through 2021.
While the above changes are relatively minor in comparison to the TCJA, which was passed at the end of 2017, these are still significant changes to be aware of. Please be in touch with your associate if you have any questions on how these changes may affect you in the coming tax year.