SECURE Act affecting individuals and Tax Extenders
Dear Clients and Friends:
The SECURE Act was passed into law in December 2019, and it is legislation that may affect how you plan for retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement planning situation.
Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals. The changes in the law might provide you and your family with tax savings opportunities. However, not all changes are favorable, and there may be steps you could take to minimize their impact. An additional letter is available on our website detailing the items of the SECURE Act affecting employer sponsored plans and businesses.
Also in December 2019, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Disaster Act) was passed into law, and it extends over 30 Code provisions retroactive to January 1, 2018, generally through 2020. A listing of the extended Code provisions most likely to be impactful are listed towards the end of this letter. For a complete list, including explanations, of the income tax extenders, please visit our website at www.yallccpa.com under client letters. An additional letter is available on our website detailing the disaster relief items within the Disaster Act.
Key provisions of the SECURE Act affecting individuals:
Repeal of the maximum age for traditional IRA contributions.
Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.
Required minimum distribution age raised from 70½ to 72.
Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.
For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.
Partial elimination of stretch IRAs.
For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the IRA context, this is sometimes referred to as a "stretch IRA").
However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant’s or IRA owner’s death.
Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.
A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary's qualified higher education expenses.
Before 2019, qualified higher education expenses didn't include the expenses of registered apprenticeships or student loan repayments.
For distributions made after December 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program. In addition, tax-free distributions up to $10,000 are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.
Kiddie tax changes for gold star children and others.
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made changes to the so-called kiddie tax, which is a tax on the unearned income of certain children. Before enactment of the TCJA, the net unearned income of a child was taxed at the parents' tax rates if the parents' tax rates were higher than the tax rates of the child.
Under the TCJA, for tax years beginning after December 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.
There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (gold star children), first responders, and emergency medical workers.
The new rules enacted on December 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.
Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.
Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59-1/2 is subject to a 10% early withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.
Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.
Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.
Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.
Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.
Many home healthcare workers do not have taxable income because their only compensation comes from difficulty-of-care payments that are exempt from taxation. Because those workers do not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA.
For IRA contributions made after December 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.
Key income tax extenders:
- Exclusion from gross income of discharge of qualified principal residence indebtedness up to a $2 million limit
- Treatment of mortgage insurance premiums as qualified residence interest
- Reduction in the medical expense deduction floor from 10% to 7.5%
- Deduction of qualified tuition and related expenses
- Indian employment credit
- Classification of certain racehorses as three-year property
- Empowerment zone tax incentives: extension of expensing rules for certain film productions
- Biodiesel and renewable diesel fuels income tax credit
- Nonbusiness energy property credit for energy efficient improvements to principal residences
- Qualified fuel cell motor vehicles credit
- Alternative fuel refueling property credit
- Energy efficient homes credit for manufacturers of residential homes
- Energy efficient commercial buildings deduction
- New markets tax credit
- Employer tax credit for paid family and medical leave
- Work opportunity tax credit
- Credit for health insurance costs of eligible individuals
Please contact our office with questions.
YOUNG & ASSOCIATES, LLC