Just before the holidays, the Consolidated Appropriations Act, 2020 was passed. A number of tax law changes are included in the bill, including extenders, retirement plan funding and distribution reform, and disaster relief. Below are a few of the changes affecting individuals:
Individual Extenders
Individual extenders include the reductions in the adjusted gross income (AGI) floor for medical and dental expense deductions from 10 to 7.5%, the above-the-line deduction for tuition and fees, the treatment of mortgage insurance premiums (PMI) as deductible qualified residence interest, and the exclusion of qualified principal residence indebtedness from gross income.
IRA Changes
Changes in the Act for IRAs include:
Moving the start date for required minimum distributions (RMDs) to the year in which the owner turns 72.
Ending the 70 ½ age limit for contributions to an IRA.
Shortening the distribution period for non-spouse inherited IRAs to a 10-year maximum.
401(k) Changes
Requiring plans to offer participation to long-term, part-time employees.
Encouraging auto-enrollment by increasing the cap.
Adding a new tax credit for small employers using auto-enrollment plans.
Streamlining the safe harbor for non-elective contributions.
Permitting qualified birth or adoption distributions up to $5,000 that would be exempt from the early-withdrawal penalty.
Counting the below as compensation for purposes of retirement plan contributions
Taxable non-tuition fellowships and stipends.
Nontaxable "difficulty of care payments" earned by home healthcare workers.
Kiddie Tax
The Act also includes several "fixes" to TCJA provisions. One of which is the application of the estates and trusts tax rate to certain unearned income of children (the "kiddie tax"). The "kiddie tax" has been reverted to the prior use of the parents' tax rate for tax years beginning after 2019.
Disaster Tax Relief
The Consolidated Appropriations Act, 2020 also includes disaster tax relief for federally declared disaster areas generally during 2018 and 2019. The relief includes the forgiveness of early-withdrawal penalties under Code Sec. 72(t) for qualified disaster distributions, the recontribution of amounts withdrawn for home purchases, and an increase in the amount of loans from qualified plans. An employee retention credit is also allowed for employers in affected areas, as well as special casualty loss rules for affected individuals.
The package of disaster tax relief is essentially the same as is regularly provided in the wake of major disasters like hurricanes or wildfires. However, unlike the disaster-by-disaster approach that's typically taken, this relief applies to all declared disasters during the period beginning Jan. 1, 2018, and ending 30 days after the date of enactment of the Act, except for the California wildfire disaster area, for which relief was already provided in the Bipartisan Budget Act of 2018.
Additional Items
Below are a few reminders of tax law changes from the Tax Cuts and Jobs Acts (TCJA) and other tax issues which might affect you. Please keep these in mind when gathering your 2019 tax information:
Standard deduction - The 2019 standard deduction is $12,200 for single filers and married filers filing separately, and $24,400 for married filers filing jointly and $18,350 for head of household filers.
State and local taxes - State and local taxes are limited to $10,000 per year for itemized deductions. This includes your state and local withholdings, real estate taxes and auto registration fees.
Miscellaneous itemized deductions - These are all but eliminated. There is no need to gather documentation for unreimbursed business expenses, investment fees, safe deposit box fees, or union dues, as these are no longer deductible.
Alimony - Beginning with divorces and separation agreements entered into after December 31, 2018, alimony or separate maintenance payments are no longer deductible by the payor, nor includible in the income of the payee.
Qualified Business Income (QBI) Deduction - An individual with QBI from a partnership, S corporation or sole proprietorship is generally allowed a maximum tax deduction of 20% of QBI. There are some limitations which makes this deduction difficult to calculate.
If you have a rental property or properties, do you have at least 250 hours of services performed on the property/properties? This includes services performed by owners, employees and contractors. The hours must be documented
Virtual Currency - If you are investing in virtual currency (i.e. Bitcoin), you are required to report any gains or losses from the sale of the currency on your tax return. Also, if your wallet is in a foreign country there may be some foreign reporting requirements. Please provide us with the necessary information to properly report your virtual currency transactions on your tax return. If we receive no information, we are under the assumption that you have no 2019 virtual currency transactions.
Sale of Life Insurance Policy - If you sold a life insurance policy to a third party for cash you might have a taxable gain. This gain could be taxed as ordinary income, capital gain or both. In order to compute the gain, please provide us the amount of premiums paid, cash surrender value of the policy on the date of the sale, and the sales proceeds