It must be the holiday season as Congress and the President have gifted taxpayers with another tax law at year end. The Consolidated Appropriations Act, 2020 (“Act”) will keep the Federal government in operation for another year, provides many tax provisions, and enacts reforms to pension and retirement savings plans. Following is a brief rundown of items in the Act. Cherry Bekaert will provide further coverage of specific provisions of the Act early in the new year.
Tax Extenders
“Tax extenders” is the short hand name given to a group of temporary tax incentives that Congress must renew on a regular basis. Many of the tax extenders expired at the end of 2017 or 2018. The following selected provisions expired in 2017. The Act reinstates these credits/deductions from January 1, 2018 forward to the end of 2020.
- Section 45L – credits for construction of new energy efficient homes
- Section 179D – accelerated deductions for energy efficient improvements to commercial buildings
- Section 25C – credits for non-business energy property
Credits that were set to expire at the end of 2019 are given an extra year:
- Work Opportunity Tax Credit
- Credit for paid family and medical leave
- New markets tax credit (expanded to $5 billion)
Individual Taxpayers
A few tax extenders will benefit individual taxpayers:
- Tuition and fees deduction from gross income
- Itemized deduction for mortgage insurance premiums
- Exclusion of cancellation of debt income from qualified principal resident mortgages
The Act also changed how children are taxed on unearned income. The Act repealed a provision of the Tax Cuts and Jobs Act of 2017 (“TCJA”) that applied the trust income tax rates to children’s investment type income. This approach has been repealed and the “kiddie tax” will apply as it did in 2017. That is, children’s unearned income will be taxed at their parents’ highest marginal tax rate.
Medical expenses will now be deductible to the extent they exceed 7.5% of AGI, rather than the 10% of AGI rule that applied for most taxpayers for 2017 and 2018.
Retirement Plans & Savings
Individuals were winners and losers when it comes to the retirement plan provisions.
On the winning side, individuals over age 70 ½ with earned income can now contribute to a traditional IRA, and required minimum distributions from plans do not need to begin before age 72. Part-time workers over age 21 who work at least 500 hours in three consecutive years can no longer be excluded from an employer’s §401(k) plan merely because they work less than 1000 hours per year. Parents can take an early distribution from a plan for the birth or adoption of a child without incurring the 10% additional tax on early retirement plan distributions.
On the losing side, a change in required minimum distributions to beneficiaries of an inherited IRA may accelerate retirement plan distributions. Unless certain exceptions are met, a beneficiary of an inherited IRA must withdraw the entire IRA plan balance over 10 years. Exceptions to the 10 year rule include a spouse, minor child, a disabled or chronically ill person or an age difference of less than 10 years between the younger beneficiary and the older decedent.
Employers will benefit from an increase in the pension plan start up credit from $500 to as much as $5000, or, if lesser, $250 per non-highly compensated employee included in the plan. In addition, employers who find they fail discrimination tests can adopt a safe harbor plan with a 4% of compensation contribution after the beginning of the year. Among other changes, employers will be able to adopt a qualified retirement plan after the close of their tax year. This flexibility in when to establish a plan can facilitate tax savings after an employer has a particularly profitable year and wants to share the success with employees.
Retirement plan and savings provisions are effective for years after 2019, and in some cases 2020.
Not-For-Profit
The Act provides a big win for the not-for-profit community. The Act retroactively eliminates the provision in TJCA that required tax exempt organizations to pay tax on the costs of transportation fringe benefits (e.g., employee parking).
Disaster Recovery
Also of note, the Act includes tax measures to benefit individuals and businesses recovering from wildfires, floods, hurricanes and other events in federally declared disaster areas. The Act codifies a 60 day automatic extension of all tax filing deadlines for taxpayers located in a federally declared disaster area. In addition, the Act eases the annual contribution limits with respect to donations by business and individuals giving to provide relief to those affected by disasters.
Health Care Taxes
The Act chips away at a few more provisions from the Affordable Care Act of 2010. The Act repeals the medical devices excise tax and the “Cadillac” tax on high cost employer provided health plans in 2020 and repeals the health insurance provider fee in 2021. However, the PCORI fee taxes on insured and self-insured plans, set to expire in 2019, were extended 10 years.
Penalty Taxes
The minimum penalty for failure to file a tax return with no tax due has increased, as have the penalties for failure to file Form 5500 for benefit plans, effective for returns due after December 31, 2019.
What’s Missing?
Taxpayers and tax professionals are still looking for the gift of technical corrections to provisions in TCJA. This Act included only a few such items. High on the wish list of amendments and technical corrections for many taxpayers:
- 15 year life for qualified improvement property in commercial buildings
- Increase or repeal the $10,000 cap on deductions of state and local taxes by individuals
It is a hope that we do not have to wait until next December for Congress to address TCJA technical corrections.
The discussion above only highlights a few of the many provisions in the Act. Cherry Bekaert will issue additional guidance on the Act in 2020. If you have questions regarding these provisions, please reach out to your Cherry Bekaert tax advisor.
