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In late December, Congress passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act that contains many significant changes regarding retirement accounts. Congress also passed two appropriation bills that contain tax provisions. The following is a summary of the most relevant changes.
SECURE Act Changes
1. Repeal of Age Limit for Traditional IRA Contributions. For tax years beginning after December 31, 2019, the Act repeals the age 70–½ limit for making traditional IRA contributions. Individuals of any age will be able to make such contributions up to the amount of their earned income. However, the $100,000 annual limit for excluding from income qualified charitable distributions from any IRA will be reduced by any IRA contributions made for all tax years made after the taxpayer turns 70½.
2. Plans Adopted by Filing Due Date Treated as in Effect as Close of Year. For tax years beginning after December 31, 2019, the Act allows taxpayers to treat a qualified retirement plan adopted on or before the due date (including extensions) of the tax return to treat the plan as having been adopted as of the last day of the tax year. This change mirrors the rule for the deductibility of plan contributions, and will allow taxpayers more post-year-end planning opportunities.
3. Expansion of Allowable Section 529 Plan Distributions. For distributions made after December 31, 2018, distributions from Section 529 plans are allowed for registered apprenticeships and for up to $10,000 in qualified student loan payments (principal and interest).
4. Restrictions on “Stretch” IRA’s. Effective for distributions from IRA’s of owners who die after December 31, 2019, the owner’s account balance must generally be distributed within ten years after date of the owner’s death. This rule applies whether or not the owner had started taking distributions before his or her death.
· Distributions do not need to made pro-rata or at any certain amount per year. The entire distribution can be made in year ten.
However, distributions to the following beneficiaries may still be made over the life expectancy of the beneficiary-
· a surviving spouse.
· a child who has not yet reached the age of majority.
· a chronically ill individual, as specially defined.
· Any other individual who is not more than ten years younger than the decedent.
5. Increased Penalties on Failures to File. For returns with due dates after December 31, 2019, the failure to file penalty for income tax returns is increased from the lesser of $205 per day or 100% of tax due to the lesser of $400 per day or 100% of tax due. The penalty for failure to file Form 5500 is increased from $25 per day, up to $15,000, to $250 per day, up to $150,000.
6. Single Excise Tax Rate on Private Foundation Net Investment Income. For tax years beginning after December 31, 2019, the two-tier excise tax on private foundation net investment income of either 1% or 2% (depending on the amount of charitable distributions) has been changed to one rate of 1.39%, regardless of charitable distributions.
7. Extender Provisions. The following provisions that were to expire have been extended-
· The exclusion from income for discharge of home mortgage debt of up to $2MM is extended for discharges before January 1, 2021.
· The deduction for mortgage insurance premiums is extended through 2020.
· The reduction in the medical expense floor from 10% to 7.5% is extended through 2020.
· The deduction for qualified tuition is extended through 2020.
· The credit for nonbusiness energy property is extended through 2020.
1. Repeal of the “Parking Tax” on Nonprofits. This tax provision was repealed retroactive to the original enactment date, so it will be as if it never existed. The IRS has not yet issued guidance on how to obtain a refund of tax paid, whether entities that paid this tax in 2018 will need to file a claim for refund, or whether the IRS will issue the refund on their own.
2. Repeal of ACA Taxes. Three taxes imposed by the ACA were repealed – 1) the medical device excise tax for sales after December 31, 2019; 2) the health insurer provider fee for years beginning after December 31, 2020; and 3) the tax on high-cost employer-sponsored health coverage (“Cadillac plans”) for years beginning after December 31, 2019.