The federal government spending package titled the Further Consolidated Appropriations Act, 2020 and signed into law on December 20, 2019, averted a government shutdown that would have begun on December 19 and funds the government through September 30, 2020. The Act also includes various tax provisions. The tax legislation, which was the product of intense negotiations between congressional leaders and the White House, extends through 2020 some of the tax incentives for individuals and businesses, known as extenders, that had already expired or that were due to expire at the end of 2019. The legislation also provides retirement savings incentives, repeals several health-care-related taxes and more.
The following are some of the highlights.
Below are some of the most widely relevant tax provisions that have been extended through 2020:
- The exclusion from gross income of discharge of qualified principal residence indebtedness;
- The treatment of mortgage insurance premiums as qualified residence interest for itemized deduction purposes;
- The reduction in the medical expense itemized deduction floor to 7.5% of adjusted gross income;
- The above-the-line deduction for qualified tuition and related expenses;
- Empowerment zone tax incentives;
- The new markets credit;
- The employer tax credit for paid family and medical leave; and
- The work opportunity credit.
The extension of some breaks that had expired at the end of 2017 but that now have been retroactively revived means that some taxpayers should consider filing amended returns for 2018. However, the tax deal did not expand the earned income tax credit or fix the so-called retail glitch in the Tax Cuts and Jobs Act that left leasehold improvement property outside the category of 15-year recovery property qualifying for 100% bonus depreciation. As a result, retailers must recover the cost of building improvements over 39 years instead of expensing the cost in the year incurred.
The spending package also includes the contents of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which passed the House in May 2019 with broad bipartisan support but stalled upon reaching the Senate. The SECURE Act is primarily intended to encourage saving for retirement, though it’s not entirely favorable to taxpayers. Most provisions take effect January 1, 2020 and below are some of the most significant changes affecting individuals:
- Elimination of the age 70½ limit for making traditional IRA contributions so that anyone can contribute so long as they are working, matching the existing rules for 401(k) plans and Roth IRAs;
- Moving the start date at which taxpayers must begin taking required minimum distributions (RMDs) from 70½ to 72;
- An exemption from the 10% early withdrawal penalty on retirement account distributions before the age of 59 ½ for distributions of up to $5,000 that are used to pay for expenses related to the birth or adoption of a child;
- Partial elimination of the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies, as the distribution period for non-spouse inherited IRAs is generally shortened to a 10-year maximum for deaths of plan participants or IRA owners beginning in 2020;
- Expansion of Section 529 education savings plans to permit tax-free distributions made after December 31, 2018 to pay for fees, books, supplies and equipment required for the designated beneficiary’s participation in an apprenticeship program, or to pay the principal or interest (up to $10,000) on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary;
- Repeal of the kiddie tax measures added by the Tax Cuts and Jobs Act, so starting in 2020 (with the option to start retroactively in 2018 and/or 2019) the unearned income of children is again taxed at the parents’ tax rates, and not according to the brackets applicable to trusts and estates;
- Permitting taxable non-tuition fellowship and stipend payments received by graduate and postdoctoral students to be treated as compensation for IRA contribution purposes, enabling these students to begin saving for retirement without delay;
- A new tax credit for small employers using auto-enrollment retirement plans; and
- A new requirement that employers allow participation in their retirement plans by part-time employees who have worked at least 500 hours in three consecutive years.
Health-Care Related Taxes
The Act also repealed the following taxes first passed as part of the Affordable Care Act:
- The 2% medical device excise tax;
- The annual fee on health insurance providers known as the health insurance tax; and
- The 40% excise tax on high-cost health insurance plans known as the Cadillac tax.
The Act also includes the following provisions benefitting not-for-profits:
- Elimination, retroactively, of the unpopular transportation fringe benefits tax (known as the “church parking tax”) imposed on not-for-profits, which treated the value of parking benefits provided to employees as unrelated business taxable income; and
- Decrease of the excise tax on private foundations’ net investment income to 1.39% from 2%, effective for tax years beginning after December 20, 2019.