Taxes in Your Practice: New developments for 2020

The Act also included the widely publicized “Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) with a variety of changes impacting retirement planning. This article highlights selected provisions from the Act and SECURE Act for consideration as we begin 2020.

Credits and Expensing

A variety of credits and expensing items were extended or changed (see the Act for details and calculations), including the following:

• Credits for contractors of qualifying energy efficient homes sold or leased for residential use are extended to 2018, 2019, and 2020.
• Energy efficient commercial property deductions are extended to property placed in service before 2021, with limitations.
• Credits for non-business energy property and improvements are extended for property placed in service in 2018, 2019, and 2020.
• Credits for alternative fuel refueling property, fuel cell vehicles (propelled by oxygen-hydrogen combination), and two-wheeled plug-in electric drive motors are extended to acquisitions before 2021.
• Credits for electricity produced at qualified facilities from renewable resources are extended through 2020, with additional details in the Act regarding phaseout of credits for wind facilities.
• Biodiesel and renewable diesel credits are extended through 2022.
• Certain racehorses are depreciable over three years if placed in service before 2021.
• Motorsports entertainment complexes are depreciable over seven years if placed in service before 2021.
• Several employment credits are extended through 2020, including the Indian employment credit, work opportunity credit, and paid family and medical leave credit.
• Qualified property placed in service on Indian reservations before 2021 receives acceleration depreciation.
• The New Markets Tax Credit for investment in qualified community development is extended through 2020.
• The medical expense deduction floor is reduced from 10% to 7.5% for 2019 and 2020, and there is no related adjustment when computing alternative minimum tax.
• Mortgage insurance premiums relating to acquisition debt of a qualified residence are treated as qualified residence interest for 2018, 2019, and 2020.
• Qualified principal residence debt discharged before 2021 is not included in discharge of indebtedness income.

Education Expenses

The Act and SECURE Act have provisions related to education expenses, including the following:

• Qualified tuition and related expenses of up to $4,000 (subject to phaseout) for a taxpayer, a spouse, or a dependent are deductible for 2018, 2019, and 2020.
• Tax-free § 529 plan distributions of up to $10,000 per person may now be used for payments of principal and interest on qualified education loans of the beneficiary or a sibling of the beneficiary.
• Section 529 plan funds can now be used tax-free for costs relating to a registered and certified apprenticeship program.

Retirement Plans

Changes for retirement plans and planning (see the Act and the SECURE Act for details) include the following:

• An increased credit for retirement plan startup costs incurred by an eligible small employer after 2019.
• An eligible employer credit for startup costs for certain new retirement plans with automatic enrollment after 2019.
• Part-time employees working at least 500 hours per year for three consecutive years who are 21 years old by the end of the three-year period must be allowed to make elective deferrals in the employer’s 401(k) plan.
• New parents are entitled to retirement plan withdrawals of up to $5,000 for a qualified birth or adoption.
• Taxpayers older than age 70½ can now make contributions to a traditional IRA.
• Required minimum distributions from retirement plans now begin at age 72. However, IRA owners who reached age 70½ before 2020 are still subject to the age 70½ starting date for these distributions.
• IRAs inherited by most non-spouse beneficiaries after 2019 must be distributed by the end of the 10th year following an individual’s death, eliminating the “stretch” IRA option to make the distributions over the beneficiary’s lifetime.

Disaster Provisions

There are several provisions to assist taxpayers with disasters, including the following:

• Credits for a portion of wages paid by employers conducting business in a qualified disaster zone during the disaster period, if the business was not able to operate on the first day of a disaster period after 2019.
• Qualified taxpayers in federally declared disasters receive an automatic 60-day extension for filing returns and paying tax due.
• Qualified disaster casualty losses may be claimed in addition to the standard deduction and are not subject to alternative minimum tax limitation.
• Qualified disaster distributions from retirement accounts are not subject to the 10% early withdrawal tax, may be included in income over three years, and may be recontributed to an eligible retirement account within three years.

Conclusion

Notably, several provisions of the Act extend or renew tax provisions that had expired at the end of 2017, meaning some taxpayers could benefit from amendments to their 2018 tax returns. The SECURE Act provisions significantly impact retirement planning, and the new 10-year distribution requirement for non-spouse beneficiaries of inherited IRAs may require different approaches for trust and succession planning relating to IRAs.

These issues and other provisions of the Act make significant and wide-ranging changes that may require consideration or action in 2020.