To fund the government through the end of its 2020 fiscal year and provide funding for various projects and purposes, Congress passed a massive spending measure just before adjourning for the Christmas holiday; this measure was signed into law on December 20, 2019. The Further Consolidated Appropriations Act, 2020 (H.R. 1865, http://bit.ly/2tmL2g0), enacts an estimated $426 billion in tax cuts for both individuals and businesses (Joint Committee on Taxation, http://bit.ly/39CCLoX). These changes require individuals to reexamine their tax returns for 2018, consider which new rules apply for 2019, and plan ahead for 2020 and beyond. Changes affecting businesses will be discussed in an upcoming article.

Extended Provisions

Several tax rules for individuals expired at the end of 2017; they have now been extended retroactively to 2018 as well as 2019 and 2020.

Exclusion for canceled home mortgage debt.

Usually, the cancellation of debt results in taxable income. Under this extended break, however, income of up to $2 million from the cancellation of a mortgage on a principal residence is tax-free.

Tuition and fees deduction.

Individuals with modified adjusted gross income (MAGI) up to $80,000 ($160,000 on a joint return) can take a deduction from gross income up to $2,000 for tuition and fees paid for higher education. This deduction does not require itemizing; however, depending upon MAGI, individuals may save more taxes by claiming the American Opportunity Credit or Lifetime Learning Credit, as these credits were not changed by the spending measure.

Itemized medical expenses.

The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses if itemizing, which was 7.5% of AGI in 2018, was previously set to 10% of AGI for 2019. The spending measure retains the lower AGI threshold for 2019 and 2020.

Mortgage insurance premiums.

Taxpayers with AGI below a set amount can treat mortgage insurance premiums as home mortgage interest. This deduction can only be claimed by taxpayers who itemize.

Home energy improvements.

Usually, capital improvements to a principal residence cannot be immediately written off; instead, they are added to the basis of the home, which minimizes gain when the home is sold. Certain energy improvements, however, such as insulation and storm windows, may now qualify for a tax credit up to $500.

Retirement Savings

The Setting Every Community Up for Retirement Enhancement (Secure) Act was included in the spending measure. This legislation—the first major change for retirement plans and IRAs since the Pension Protection Act of 2006—makes dramatic changes. The effective dates of the different provisions vary considerably. The following are some of the big changes for individuals.

End to IRA age cap.

For 2019, no contribution to a traditional IRA can be made by someone who attains age 70½ by the end of the year. Starting in 2020, there is no age limit, so that anyone who has income from a job or self-employment can make contributions. There is no age limit for Roth IRA contributions; this has not changed.

Increase in age for RMDs.

Currently, required minimum distributions (RMD) must begin by the end of the year in which an individual attains age 70½ (although the first RMD can be postponed until April 1 of the following year). Under the new law, for anyone who attains age 70½ after 2019, RMDs do not have to commence before age 72. This gives some individuals one or two more years of tax deferral (depending on when their birthday falls).

End to “stretch” for beneficiaries.

Previously, individuals who inherited a required retirement account or IRA could spread their RMDs over their life expectancy (Single Life Expectancy IRS Publication 590-B, Table I). Under the new law, beneficiaries who inherit an account from a decedent dying after 2019 must drain the account no later than 10 years after the decedent’s death. This new rule does not apply to the following:

  • A surviving spouse. The spouse can roll over an inherited account and treat it as his own.
  • A minor child. This exception ceases to apply, however, when the child reaches the age of majority, at which point the remainder of the distribution must be completed within 10 years of the age of majority.
  • A disabled individual. This is a person unable to engage in any substantial gainful activity due to a medically determinable physical or mental impairment, or a chronically ill individual unable to perform at least two activities of daily living as of the date of the death of the plan participant or IRA owner.
  • Any individual who is not more than 10 years younger than the deceased participant or IRA owner.

Expanded definition of “compensation.”

Home healthcare workers do not have to include in gross income the “difficulty of care” payments they receive. They can, however, treat these payments as compensation for purposes of making contributions to a 401(k) plan or IRA. This change applies to contributions made on or after December 20, 2019.

Penalty-free withdrawals from qualified retirement plans.

The 10% early distribution penalty that usually applies for distributions prior to age 59½ does not apply to distributions used to pay expenses for childbirth or adoption, up to $5,000. This penalty exemption applies starting in 2020.

Penalty-free withdrawals from 529 plans.

Distributions from IRC section 529 plans used to pay qualified education costs are not taxed. Starting in 2020, distributions of up to $10,000 to pay student loan debt are treated as qualified costs and thus are tax-free.

Anyone now eligible for a tax break with respect to a 2018 return should determine whether it makes sense to file an amended return.

Other Changes

The Tax Cuts and Jobs Act of 2017 (TCJA) had revised the “kiddie tax” to subject the unearned income of children to tax based on rates for trusts and estates. The act repeals this provision [Internal Revenue Code (IRC) section 1(j)(4)], so that a child’s investment income over a set amount is taxed at the parents’ highest marginal rate. This change is generally effective starting in 2020, but can be elected for 2018 or 2019.

While most of the changes in the act reduce taxes, there are some revenue raisers as well (in addition to the end of the “stretch”). These include an increase in the failure-to-file penalty from $330 to $435. This change applies to tax returns required to be filed after December 31, 2019 (i.e., 2019 income tax returns filed in the 2020 tax season).

Amended Returns May Be Necessary

Anyone now eligible for a tax break with respect to a 2018 return should determine whether it makes sense to file an amended return. Generally, an individual has three years from the date that the return was filed (or the due date, if later) to submit a refund claim on an amended return.

Expect to see considerable IRS guidance on these law changes in the coming months.

Sidney Kess, JD, LLM, CPA is of counsel to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Advisory Board.

Adapted with permission from the January 8, 2020, edition of the New York Law Journal. © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact (877) 257-3382 or [email protected].