Year-End Tax Package Signed into Law

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On December 20, President Trump signed a bipartisan, year-end $426 billion government spending and tax package into law just hours before federal funding was set to expire. The Further Consolidated Appropriations Act of 2020 had passed both Houses of Congress earlier in the week by substantial margins, garnering a 297 to 120 vote in the House and winning 71 of 94 votes in the Senate. It keeps the federal government open through September 30, 2020.

 

SECURE Act

The law includes the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which had passed the House in the spring with bipartisan support before stalling in the Senate. This provision makes major changes to IRAs and 401(k) plans.

 

The start date for required minimum IRA distributions is delayed from the year the owner turns age 70½ to the year he or she turns 72. Individuals still working may for the first time contribute to IRAs beyond age 70½. The "stretch" IRA, which allowed beneficiaries of inherited IRAs to have extended payout periods (perhaps 70 years for a young grandchild) has been eliminated for deaths after 2019. Beneficiaries (other than spouses) must now pay out the decedent's IRA over no more than 10 years.

 

Significant changes for 401(k) plans include requiring plans to allow long-term part-time employees to participate and allowing distributions for births and adoptions. Larger savings through auto-enrollment are encouraged by allowing employees to automatically contribute up to 15% (previously 10%) of compensation. A new tax credit has also been added to employers who use auto-enrollment plans.

 

Tax Extenders

Over two dozen so-called "extenders," some of which had expired after 2017, were lengthened retroactively (most thorough 2020). These taxpayer-friendly benefits have historically been passed for only two years at a time, but the current logjam in Washington has kept taxpayers in limbo for three. Some of the extenders affect 2018 returns already filed, so taxpayers must file amended returns to take advantage of them.

 

Individuals may continue to deduct medical expenses that exceed 7.5% of their Adjusted Gross Income (that cap had been slated to rise to 10% in 2019). An exclusion from gross income for the discharge of a qualified principal residence mortgage was reinstated. Mortgage insurance premiums are still deductible as interest for some taxpayers. Those under certain income thresholds levels may continue to deduct higher education tuition and fees whether or not they itemize their deductions.

 

Business extenders include industry-specific depreciation benefits as well as incentives intended to spur investment in economically depressed areas. Many energy credits were extended, some through 2022. The credit for employers providing paid family and medical leave, enacted under the Tax Cuts and Jobs Act, was scheduled to expire after 2019 but has been extended for a year.

 

TCJA Fixes

Some unintended consequences of 2017's hastily constructed Tax Cuts and Jobs Act (TCJA) were corrected under the new law. One TCJA provision had unintentionally raised the tax on military death benefits. Another required church employees to pay tax on their reserved parking spaces.

 

Although those oversights were rectified, a much hoped-for fix to leasehold improvement depreciation was not addressed. TCJA writers had intended such property to be deducted over 15 years and be eligible for 100% bonus depreciation but inadvertently required that it be written off over 39 years (see LMC TCJA Alert #12).

 

Contact your LMC professional if you have questions about the new tax law. All our prior Alerts are available on the Updates page of our website.

 

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