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Year-End Tax Legislation Signed by the President
Posted in Tax and Finance
Year-End Tax Legislation Signed by the President

The House and Senate approved a year-end spending package, entitled the Further Consolidated Appropriations Act, 2020, H.R. 1865, 116th Congress (2019-2020) (“Consolidated Act”), which was signed by President Trump on December 20th in order to avoid a government shutdown. This Article discusses its most notable provisions.

II. Tax Extenders

The Consolidated Act renews almost all of the tax extenders that expired or were soon-to-be expired, making them retroactively effective for 2018 and extending them through 2020.

Individuals. Individual tax extenders that are renewed include the deduction for unreimbursed medical and dental expenses that are above 7.5% (instead of 10%) of an individual’s adjusted gross income; the above-the-line qualified tuition and fees deduction; the exclusion from income of qualified principal residence indebtedness; and the mortgage insurance premium (or PMI) deduction.

Businesses. Tax extenders affecting businesses that are renewed include the employer credit for paid family and medical leave; the work opportunity credit; the new markets tax credit and the incentives for investments in empowerment zones; and several provisions related to the production of alcohol.

Energy Credits. There are also renewed tax extenders relating to energy credits, such as the credits for nonbusiness energy property and energy efficient commercial buildings. Additionally, the incentives for biodiesel and renewable diesel are extended through 2022.

III. TCJA Changes

The Consolidated Act also made some changes to the Tax Cuts and Jobs Act, P.L. 115-97 (2017) (“TCJA”).

Kiddie Tax. Included in the Consolidated Act, the SECURE Act (discussed in more detail below) repeals the changes made to the kiddie tax by the TCJA, so that a child’s unearned income will once again be taxed at the parents’ tax rate if higher than the child’s tax rate. This provision is effective beginning January 1, 2020, though taxpayers may elect to apply it to tax years 2018 and 2019.

UBIT Relief for Exempt Organizations. Under section 512(a)(7) of the Internal Revenue Code of 1986, as amended (“Code”), which was implemented by the TCJA, expenses of exempt organizations, including churches, related to qualified transportation fringe benefits are subject to the unrelated business income tax. However, section 512(a)(7) of the Code has been retroactively repealed by the Consolidated Act.

IV. The SECURE Act

Perhaps most notably, the Consolidated Act includes the Setting Every Community Up for Retirement Enhancement Act of 2019, H.R. 1994, 116th Congress (2019-2020) (“SECURE Act”), an extensive retirement bill aimed at making saving easier. Some of the more noteworthy provisions of the SECURE Act are highlighted below:

Required Minimum Distributions. Under the SECURE Act, the age at which one must begin taking required minimum distributions has been extended from 70½ to 72, allowing retirement savings to grow tax-free a bit longer. This provision applies to those who turn 70½ on or after January 1, 2020.

Qualified Birth or Adoption Distributions. The SECURE Act provides an exception to the 10% early withdrawal penalty in the case of a qualified birth or adoption distribution. The distribution cannot exceed $5,000 and must be made within one year of the qualified birth or adoption. Such distributions may be recontributed to an applicable eligible retirement plan, subject to certain requirements.

Inherited IRAs. The SECURE Act effectively eliminates the so-called “stretch IRA,” an estate planning tool that allows non-spousal beneficiaries to take required minimum distributions from an inherited IRA based on their life expectancy. Under the SECURE Act, these beneficiaries will instead have to withdraw their distributions—and pay taxes on them—from the inherited IRA within 10 years, rather than over the course of their lifetime. This provision will only apply to those who inherit IRAs on or after January 1, 2020. Additionally, there are exceptions provided for certain beneficiaries, such as spouses, the chronically ill, or the disabled.

Contributions. The SECURE Act eliminates the age restriction (70½) on making deductible contributions to a traditional IRA, provided the person has compensation. The term compensation for this purpose is expanded by the SECURE Act to include non-tuition fellowship and stipend payments received by individuals pursuing graduate or postdoctoral studies.

401(k) Changes. The SECURE Act amended section 401(k)(2)(D) of the Code to provide employees another means to participate in 401(k) cash or deferral arrangements. Specifically, under the SECURE Act, employees must satisfy certain participation requirements by completing either (i) one year of service in which the employee has not less than 1,000 hours of service, or (ii) three consecutive years of service in each of which the employee has at least 500 hours of service, as long as the employee satisfies the 21-year age requirement by the end of the three-year period. This provision does not apply to collectively bargained employees.

Other 401(k) changes include the deferral amount for the automatic enrollment safe harbor being raised from 10% to 15%, the elimination of the notice requirement for the 3% non-elective contribution safe harbor, and the allowance of plan amendments at any time before the 30th day before the close of the plan year (with amendments allowed after this timeframe only under certain circumstances).

Retirement Plans for Small Businesses. The SECURE Act makes it easier for small businesses to offer retirement plans to their employees by increasing the available tax credit for start-up costs under section 45E of the Code to the greater of $500 or the lesser of (i) $250 for each non-highly compensated employee who is eligible to participate in the plan, or (ii) $5,000. Thus, the maximum credit amount is now up to $5,000 whereas, prior to the SECURE Act, the credit was limited to $500 per year. Additionally, the SECURE Act has created a new $500 tax credit for start-up costs for qualified plans that include automatic enrollment. This credit is available in addition to the other credit. The SECURE Act also makes it easier for multi-employer plans by allowing employers to participate in such plans regardless of whether or not they are similar or from the same industry. Such plans are to be administered by a pooled plan advisor.  

V. Repeal of Certain ACA Provisions

Certain provisions of the Patient Protection and Affordable Care Act, P.L. 111-148 (2010), were also affected by the Consolidated Act. Specifically, the 40% excise tax on high-cost health insurance benefits, the so-called “Cadillac tax,” has been repealed, as has the 2.3% excise tax on medical devices, both effective beginning in 2020. Additionally, the annual health insurance tax imposed on providers of health insurance has been repealed, effective beginning in 2021.

VI. Conclusion

The Consolidated Act is an extensive bill, the full contents of which cannot be properly covered here. However, outlined above are some of its more noteworthy provisions that taxpayers should be aware of in the new year.

  • Ross D. Cohen
    Partner

    Ross D. Cohen serves as Co-Leader of the Federal Tax Team and concentrates his practice on federal tax transactional and planning issues of partnerships, joint ventures, limited liability companies and S and C corporations.

    With ...

  • Caitlin G. Rieser
    Associate

    Caitlin is an attorney in the Tax & Employee Benefits Department where she assists with state and local taxation issues, as well as federal transactional tax work with a focus on pass-through entities.

    While in law school, Caitlin was ...

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