President Trump signed the Consolidated Appropriations Act, 2020 to prevent a government shutdown that was to begin on December 21, 2019. The Act included many tax provisions with retroactive effective dates of January 1, 2018 and January 1, 2019 and extending them through the end of 2020. The 2018 retroactive provisions provides many taxpayers the ability to reduce their 2018 tax liability even though the 2018 tax returns have been filed. Taking advantage of the 2018 retroactive provisions may require amended tax returns but the IRS may issue guidance to streamline the process to avoid all the amended returns.
Here are the key provisions with a retroactive effective date of January 1, 2018.
- Tuition and fees deduction
- Mortgage insurance premiums qualify as qualified residence interest
- Exclusion of qualified principal residence indebtedness from gross income
- Non-business energy credit
Here are the key provisions with a retroactive effective date of January 1, 2019.
- The medical expense deductions are deductible to the extent of 7.5% of adjusted gross income. Previously, it was 10% of adjusted gross income.
Additional extender provisions through 2020
- Employer credit for providing paid family and medical leave
The key provisions relating to retirement plan funding and distribution provisions are:
- The start date for making required minimum distributions is increased to age 72 from 70 1/2. This provision is effective for distributions required to be made after December 31, 2019, for plan participants and IRA owners who reach age 70-1/2 after December 31, 2019.
- IRA contributions can be made after turning 70 1/2. This provision would be effective for contributions made for tax years beginning after December 31, 2019.
- Non-spouse beneficiaries of inherited IRAs must take out distributions over a 10 year period rather than either 5 years or his/her life expectancy. This provision doesn’t apply when the beneficiary is within 10 years of the account owner’s age, an individual with special needs, a minor, or the account owner’s spouse. The 10 year rule would apply after the beneficiary dies or when the minor beneficiary reaches the age of majority. This eliminates the “stretch IRA”. The provision generally would be effective for required minimum distributions for IRA holders or plan participants who die after December 31, 2019.
- Long term part-time employees (working at least 500 hours a year for at least three consecutive years and reached age 21 by the end of the three year period) are eligible to participate in 401(k) plans. This provision is effective for plan years beginning after December 31, 2020.
- Distributions can be made for expenses associated with the birth or adoption of a child and allow recontributions of withdrawn amounts. This provision is effective for distributions made after December 31, 2019.
- 15% cap on contributions for automatic enrollment of employees. This provision is effective for plan years beginning after December 31, 2019.
- New tax credit of up to $500 per year for small employers using auto-enrollment plans. This provision is effective for plan years beginning after December 31, 2019.
- Streamlining the safe-harbor for non-elective contributions.
- Up to $5,000 for qualified birth or adoption distributions would be exempt from the 10% early withdrawal penalty. This provision is effective for distributions for tax years beginning after December 31, 2019.
- Taxable non-tuition fellowships and stipends for graduate and post-doctoral students are considered compensation to allow for retirement plan contributions. This provision is effective for taxable years beginning after December 31, 2019.
- Employer is able to adopt a retirement plan after the end of the taxable year but before the tax return filing deadline (including extensions) and elect to treat the plan as having been adopted as of the last day of the previous taxable year. This provision is effective for plans adopted for taxable years beginning after December 31, 2019.
Other provisions include:
- Allowing Gold Star Families’ children collecting survivor benefits, and others receiving scholarship payments that would have been subject to the higher estate and trust tax rates to use the parent’s tax rate.
- Parking expenses are no longer disallowed for nonprofit organizations.
- Distributions from a 529 plan for expenses associated with registered apprenticeship programs and up to $10,000 of qualified student loan repayments would not be taxable, effective for distributions made after December 31, 2018.
The Act also includes disaster tax relief for federally declared disaster areas during 2018 and 2019.
Noticeably missing from the Act is the correction to include leasehold improvements in the 15 year recovery period to allow for the improvements to be eligible for bonus deprecation.
Please contact us with questions, or if we can help in any way at 401-831-0200.