Tax Laws Passed at the End of 2019 – Not All are 20/20

By Jean McDevitt Bullens February 18, 2020

The President signed into law two appropriations bills on December 20, 2019, including a number of tax law changes. Contained within were many tax incentives that ended on December 31, 2017 and had not been extended or addressed under the Tax Cuts and Jobs Act of 2017. Many of the extenders are effective for the 2019 and 2020 tax years and made amending 2018 tax returns to take advantage these changes an option in some instances; other changes were permanently extended.

The following is a non-exhaustive list highlighting key changes.

Individual extenders:

• the exclusion of qualified principal residence indebtedness from gross income
• mortgage insurance premium may be deducted as qualified residence mortgage interest
• the adjusted gross income (AGI) floor for the medical expense deduction is 7.5% rather than the 10% floor
• the above-the-line deduction for qualified tuition and related expenses deduction

Business extenders:

• employer credit for paid family and medical leave
• Work Opportunity Tax Credit (WOTC)
• extenders related to recovering the cost of business investments

Also included in the bill was the repeal of many taxes related to the Affordable Care Act including the 2.3% excise tax on medical devices, tax on high-end health insurance known as the “Cadillac Tax” and the excise tax on health insurance providers.

Finally, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed, which provides for major changes for retirement plans. With the partial goal of easing an approaching retirement savings crisis balanced by some necessary revenue offset provisions, the SECURE Act contains the following provisions amongst others:

• removes the age cap of 70 ½ on retirement contributions
• raises the required minimum distribution age to 72 from 70 ½
• shortens the distribution period for IRAs inherited by non-spouses to 10 years (all designation beneficiary forms should be currently reviewed and special consideration should be given to any IRA that designates a trust as the beneficiary)
• certain fellowship and stipend payments may now count as compensation for purposes of IRA contributions
• penalty free withdrawals up to $10,000 from 529 plans to repay certain student loans
• penalty free withdrawals up to $5,000 to help with certain qualified costs of the birth or adoption of a child

For a more comprehensive review of the SECURE Act, please see our previous article.

Also included in this legislation is a provision that reverts the “kiddie tax” to pre-TCJA rules. Under those rules, a child’s unearned income is taxed using his or her parent’s tax rates. Under the TCJA, a child’s unearned income is taxed using the brackets in place for trusts and estates, a highly compressed structure with the highest tax rate applicable to income over $12,750 (2019). Taxation at the parent’s tax rates may result in a lower effective tax than applying the brackets applicable to trusts and estates.

Of note, the change in the “kiddie tax” calculation is effective for tax year 2020 and beyond; however, it is also elective for tax year 2019. And 2018 tax returns may be amended to take advantage of the rule change if it would be beneficial to the taxpayer.

If you have questions about this article, please contact your BNN advisor at 800.244.7444.