New Law Signed December 20, 2019
The Consolidated Appropriations Act was enacted on December 20, 2019. The main focus of the new law is spending provisions for the fiscal year that ends on September 30, 2020. However, the new law also contains an extension of certain tax provisions that were scheduled to expire or that had already expired. The new law also contains certain new tax provisions.
Medical Expense Threshold
The new law reduces the threshold for deductible medical expenses from 10% to 7.5% of adjusted gross income for the 2019 and 2020 tax years. (The 7.5% threshold had expired after the 2018 tax year.)
Provisions Retroactively Extended for 2018 and Extended Through 2020
The new law retroactively extends many provisions that had previously expired after 2017. The provisions are extended for the 2018 through 2020 tax years.
The most prominent of these extended provisions include: The above-the-line deduction for tuition/fees on Form 1040, the deduction for mortgage insurance premiums on Schedule A, the exclusion of income on the discharge of up to $2 million of home acquisition indebtedness, and the $500 residential energy property credit.
Details about these provisions appear on page 71 of the Tax Year 2019 M+O=CPE Individual Tax Year-End Workshop Reference Book. Regarding the minor provisions listed in footnote 192 on page 71 and footnote 193 on page 72, with the exception of the election to expense mine safety equipment and the rum excise tax, these other minor provisions were also extended.
Since 2018 income tax returns have generally already been filed, taxpayers who can benefit from these retroactively-extended provisions for the 2018 tax year should consider whether the benefit of the now-extended provision(s) outweighs the cost of amending their 2018 income tax returns.
New Provisions Related to Retirement Accounts
#1: The new law changes the required beginning date for required minimum distributions from the calendar year in which the account owner attains age 70½ to the calendar year in which the account owner attains age 72.
This change is effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date. As a result, an individual who reached age 70½ on or before December 31, 2019 is unaffected by the change in the rule, even if the individual has not yet reached age 72.
#2: The new law removes the restriction that prohibited contributions to a traditional IRA, once a taxpayer reached age 70½. As a result, taxpayers with earned income will now be permitted to make IRA contributions at any age. This change is effective for contributions made for the taxable years beginning after December 31, 2019.
#3: The new law requires that IRAs and retirement plan accounts that are inherited by a non-spouse beneficiary must be distributed to the beneficiary within 10 years after the death of the account owner. However, certain exceptions apply to a minor child of the decedent and to certain beneficiaries who are disabled or chronically ill.
The change is generally effective for decedents who die after December 31, 2019. The new law does not change the required minimum distribution rules for IRAs and retirement plan accounts that are inherited by the spouse of the account owner or by any other beneficiary who is not more than 10 years younger than the account owner.
#4: The new law provides a new exception for the early-distribution penalty for certain distributions from a retirement plan for qualified birth or adoption expenses. It also changes the rules for compensation that is considered when computing allowable IRA contributions for taxpayers who receive nontaxable fellowships, stipends or certain payments received by healthcare workers.
#5: The new law makes certain changes to the rules for 401(k) plans to encourage more participation which are generally effective after December 31, 2019, and it allows certain smaller employers to join groups that pool multiple employer plans together.
#6: The new law also makes other changes to retirement plans, such as allowing a retirement plan to be treated as adopted as of the last day of a tax year if it is adopted by the filing due date (including extensions) for the income tax return covering that tax year.
Other New Provisions
#1: Effective for tax years beginning after December 31, 2019, the kiddie-tax will, again, be computed using the tax rate of the parent(s) of the child, instead of using the income tax rates that apply to trusts and estates.
The use of the trust and estate income tax rates became effective beginning in the 2018 tax year as part of the Tax Cuts and Jobs Act. Even though the new law does not technically make this provision retroactively effective, for tax years beginning in 2018, 2019 or both, taxpayers can elect to use the tax rate of the parent(s) instead of using the trust and estate tax rates.
#2: The new law also provides disaster relief for certain federally declared disaster areas.
No Correction of the Technical Glitch for Qualified Improvement Property
The new law does not fix the drafting error in the Tax Cuts and Jobs Act that unintentionally made qualified improvement property ineligible for bonus depreciation or eligible for a shorter recovery period. This issue is discussed on pages 62 and 64 of the Tax Year 2019 M+O=CPE Individual Tax Year-End Workshop Reference Book.