There’s nothing like a deadline to get things moving in Congress, and December 2019 was no exception. In the waning days of the year, lawmakers married together three important pieces of legislation that will impact many taxpayers and all American who hold 401(k) or 403(b) retirement accounts. Enacted just before Christmas, most of the bill’s provisions became effective Jan. 1, 2020, find out which tax extenders benefit you.

The Further Consolidated Appropriations Act of 2020 funds federal government operations, extends certain income tax provisions that had already expired or were due to expire at the end of 2019, and includes a retirement-related law – the Setting Every Community Up for Retirement Enhancement (SECURE) Act – that changes some important features of defined contribution plans such as 401(k) and 403(b) plans. The legislation also provides tax relief for victims of certain disasters.

Here’s a rundown of key provisions in the law.

Tax Extenders

Some of the most widely relevant breaks that have been extended through 2020 include:

  • The exclusion from gross income of discharge of qualified principal residence indebtedness, restoring a tax break that was in place before the Tax Cuts and Jobs Act of 2017 (TCJA) was enacted.
  • The treatment of mortgage insurance premiums as qualified residence interest for itemized deduction purposes. This applies to taxpayers below certain income levels and is related only to principal residences.
  • The reduction in the medical expense itemized deduction floor to 7.5 percent of adjusted gross income. This means that taxpayers with medical expenses that exceed 7.5 percent of AGI may take a medical deduction for the portion of expenses above that level. This restores the medical expense itemized deduction floor to 7.5 percent of AGI, where it had been before the TCJA boosted it to 10 percent.
  • The above-the-line deduction for qualified tuition and related expenses, enabling taxpayers to reduce their gross income by up to $4,000 to offset educational expenses.
  • Empowerment zone tax incentives, providing a tax credit to businesses that hire workers who live in distressed areas. The credit is equal to 20 percent of the first $15,000 in wages earned in a taxable year if the employee both lives and works in an empowerment
  • The New Markets credit, which incentivizes business and real estate investment in low-income areas.
  • The employer tax credit for paid family and medical leave.
  • The Work Opportunity credit which incentivizes private-sector businesses to hire workers from certain target groups that have historically faced barriers to employment. Companies may receive tax credits valued between $2,400 and $9,600 for each qualifying new hire.
  • Repeals the new “kiddie tax” introduced by the Tax Cuts and Jobs Act.
  • Several additional tax incentives for employment and economic growth and for energy production and efficiency.

The legislation also repealed three health care taxes contained in the Affordable Care Act: the excise tax on certain high-cost employer health plans (“Cadillac tax”), the excise tax on medical devices, and the annual fee on health insurance providers.

The retroactive extension of some tax breaks that had expired at the end of 2017 means that some taxpayers should consider filing amended returns for 2018.

Disaster Tax Relief

The bill also provides several tax relief provisions related to disasters occurring in 2018, 2019 and up to 30 days after enactment of the legislation:

  • Eligible taxpayers can make tax-favored withdrawals from retirement plans to cover disaster-related expenses.
  • An employee retention tax credit for eligible employers equal to 40 percent of qualified wages, which are wages paid to an employee during the time the employer’s business is not operating due to a natural disaster (up to 150 days after the disaster).
  • Special rules for disaster-related personal casualty losses and for determining earned income for purposes of the earned income tax credit.
  • Automatic 60-day filing extensions for certain taxpayers affected by federally declared disasters.

Retirement Plan Changes

The SECURE Act – Setting Every Community Up for Retirement Enhancement – passed the House with broad bipartisan support on a 417-3 vote last May and was widely anticipated to sail through the Senate. However, it became mired in partisan maneuvering in the Senate and appeared destined to languish indefinitely until it was rolled into this year-end spending and tax bill.

Designed to encourage saving for retirement, the SECURE Act will impact all retirement savers to one degree or another. Its provisions already took effect on Jan. 1, 2020.

Here are some of the most significant provisions:

  • Eliminates the age 70½ limit for making traditional IRA contributions, so that anyone can contribute if they’re working, matching the existing rules for 401(k) plans and Roth IRAs. There is also a provision that reduces the amount you can directly contribute to charity.
  • Increases the age at which taxpayers must begin to take required minimum distributions (RMDs) from 70½ to 72.
  • Exempts from the 10 percent tax penalty on early retirement account withdrawals a maximum of $5,000 within one year of the birth of a child or an adoption becoming final.
  • Eliminates the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies. Distributions now must be taken within 10 years of the death of the original account owner. There are some exceptions to this and a spouse still qualifies.
  • Expands access to open multiple employer plans (MEPs), which give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties.
  • Eliminates employers’ potential liability when it comes to selecting appropriate annuity plans.
  • Makes it easier for long-term part-time workers to participate in workplace retirement plans providing they have worked three consecutive years of at least 500 hours and have reached age 21.
  • The SECURE Act also repealed kiddie tax rules added by the Tax Cuts and Jobs Act (TCJA) after Dec. 31, 2019. There are elections, as provided by IRS, that can be made to apply the repeal to tax years beginning in 2018, 2019 or both.

Talk To Your Tax Advisor

These are only some of the provisions in the new law. Your tax advisor can help you determine which provisions may apply to you, and whether filing amended returns for past years may be beneficial. Please contact us with any questions.