(and Setting Every Community Up for Retirement Enhancement Act of 2019)
By Cameron L. Hess, CPA, Esq.
Late-year tax changes are becoming a trend. Two parts of HR 8165, signed into law on December 20, 2019 by President Donald Trump, cover important new tax provisions, namely Division Q, the Taxpayer Certainty and Disaster Relief Act of 2019 (“Act”) which includes several “extenders” retroactive to the 2018-year and Division O, the Setting Every Community Up for Retirement Enhancement Act of 2019. (Retirement Act) which makes several pension/IRA reform changes.
A major area of enactments under the Act includes extenders to cover biofuel production and the 10% credit for l 2-wheel and 3-wheel high speed motorbikes/trikes. As a special area, these are not covered in detail below. Unfortunately, not part of the enactment are, for which may taxpayers are still awaiting are technical corrections to the 2017-year Tax Cuts and Jobs Act (TCJA, P.L.115-97), such as the Qualified Improvement Property definition, needed to fix the loss of three classes of property from 15-year depreciation and related benefits.
While outlined below is a list of some provisions, due to either broad interest or the author’s whims, not all of the new tax provisions are discussed, more complete coverage of these provisions may be found at Division O or Q of HR 8165 at the following site:
1. Qualified Principal Residence Indebtedness Exclusion. This COD income exclusion, added in 2007 had expired at the end of 2017. Under the Act, the exclusion for qualified principal residence indebtedness up to maximum of $2,000,000 is retroactively restored and is further extended through 2020. Accordingly, those who paid taxes on principal residence COD income in 2018 should review their returns and determine if they can be amended for a possible tax refund. Caution is urged insofar as, like before, as deemed sale income (capital treatment) with non-recourse indebtedness will not qualify under this exclusion, but may qualify in limited circumstances under case law. In addition, California has not conformed to this provision for several years, and is not expected to conform for state tax reporting.
2. Above-the-Line Deduction for Qualified Tuition and Related Expenses. Federal law offers several different types of deductions/credits for qualified tuition expenses. However, one had expired in 2017, but has been renewed retroactively and can be claimed on an amended 2018-year return. In particular, one of the allowable provisions used to be an above-the-line deduction for qualified tuition and related expenses for higher education. It was enacted in 2002 and was previously extended through 2017, then expired. It has now been retroactively reinstated for 2018, and will continue through the 2020-year.
Without going fully into the details, there are a few elements. First, for the higher education expense deduction, “qualified tuition and related expenses” has the same definition as for the American Opportunity and Lifetime Learning credits for higher education expenses – that is, with certain exceptions, tuition and fees paid for an eligible student (the taxpayer, the taxpayer’s spouse, or a dependent) at an eligible higher education institution.
Second, the allowable deduction is up to $2,000 (or $4,000), depending on AGI. But, there are limits. First, it is not allowed for joint filers with an AGI of $160,000 or more ($80,000 for those who are single or head of household.) No deduction is allowed for taxpayers using the married filing separate status. The phase-out amounts are not inflation-adjusted. Second, the same expenses can’t be used for both an education credit and the tuition and fees deduction. So those who claimed a credit may not necessarily save a lot in changing to a deduction. There are no “catches” – if you qualify, you need to file an amended return to get it.
The allowable deduction is up to $2,000 (or $4,000), depending on AGI. The deduction is not allowed for joint filers whose AGI is $160,000 or greater ($80,000 for those who are single or head of household.) No deduction is allowed for taxpayers using the married filing separate status. The cut-offs are not inflation-adjusted. Keep in mind that the same expenses can’t be used twice to claim both an education credit and the tuition and fees deduction.
3. Qualified Mortgage Insurance Premiums. The Act retores the deduction allowed wherein qualified mortgage insurance premiums may be treated as interest for purposes of the mortgage interest deduction through 2019. This deduction phases out for taxpayers with adjusted gross income (AGI) over $100,000 ($50,000 if married filing separately).
4. Medical AGI Limit. For those who may still be able to itemize, after the 2018-year, the deduction for excess unreimbursed medical expenses were required to exceed 10% of AGI, rather than 7.5%. Under new legislation, the lower 7.5% AGI threshold is retroactively extended two (2) -years to 7.5% through 2020.
5. Residential Energy (Efficient) Property Credit. – The energy savings credit for residential improvements has been available in one form or another since 2006 and through 2017. The credit has varied from 10% to 30% and the maximum credit has ranged from $500 to $1,500. Most recently, the credit percentage was 10%, with a lifetime credit amount limited to $500. The recent legislation extends this credit through 2020, with a lifetime credit cap of $500.
This credit applies to improvements to make one’s primary home more energy efficient. Improvements include insulation, storm windows and doors, and certain types of energy-efficient roofing materials, energy-efficient central air-conditioning systems, water heaters, heat pumps, hot water systems, circulating fans, etc., but not installation costs.
6. United States Motion Picture Production. Intended to promote small productions within the United States, the special $15 million expensing provision for qualified film, television, and theatrical productions having 75% of compensation within the United States will continue through 2020. Producers may deduct up to $15 million of the aggregate cost ($20 million for certain areas) of a qualifying film, television, or theatrical production in the year the expenditure was incurred.
7. Private Foundations – Tax on Investment Income. The Act simplified the determination of and the tax on investment income for private foundations. The tax has been reduced from two percent (2%) to only 1.39%. However, the Act concurrently deleted as a separate reduction, paragraph (e) under Section 4941(e). That paragraph allowed a reduction to the rate to only one percent (1%) if the private foundation annually meets a minimum annual distribution (wherein it would also be known as a private operating foundation.)
8. Qualified Transportation Fringe – Nonprofits. Apparently in 2017-year, Congress may have gone a bit too far in seeking to discourage employee parking as a fringe benefit. The Act took a small step backwards by removing from unrelated business taxable income the previously enacted paragraph 7 referenced as Section 512(a)(7). For nonprofit organizations, that provision treated the disallowed deduction (for employee parking or an athletic facility (such as a work-out room) as an addition to (and source of) unrelated business taxable income.
9. 401(k) Plans Must Be Open to “Permanent” Part-Timers. Under current law, employers that maintain a 401(k) plan are not required to offer it to part-time employees who work less than 1,000 hours per year. Under the Retirement Act, permanent, part-time employees who work at least 500 hours per year for three consecutive years (but less than 1,000 hours), and who meet the age requirement must also be allowed to participate in 401(k) Plans. The Retirement Act does not change the treatment of employees who work more than 1,000 hours per year. On the other hand, with respect to the changes, the Retirement Act provides for a 3-year transition, wherein, while beginning after December 31, 2020, the determination as to meeting the 500-hour requirement during any 12-month period will only commence on January 1, 2021.
10. Maximum Age Limit for Traditional IRA Contributions the Retirement Act repeals the maximum age for making traditional IRA contributions, which, prior to this legislation, prohibited traditional IRA contributions after an individual reached the age of 70½. The provision is effective for contributions made for taxable years beginning after December 31, 2019. Commentary has already been issued indicating that the taking of distributions after age 70 1/2, where contributions are made the same year or a later year may limit IRA deductions for that same or a later year.
11. Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption. The Retirement Act exempts from penalty, but not income taxes, up to $5,000 distributed from a qualified plan (or IRA), by reason of birth or adoption, if made during the one year following (i) birth or (ii) finalized adoption. For an adoption, the adoptee must be either aged 18 or younger or be any age, but physically or mentally incapable of self-support. Because the amount cannot be distributed sooner, such as prior to birth or a final adoption, this penalty exception is very limited. In addition, the child or adoptee must have a TIN by the time of reporting.
The Act also provides that distributions can later be repaid to avoid the income tax on the distribution; as the statute refers to treating it as equivalent to a rollover, wherein guidance may be needed as to whether the repayment period may be longer than 60 days or is similarly restricted. Keep in mind that while enacted, a qualified retirement plan must actually include provisions that allow distributions consistent with the new law that allow the plan administrator to legally comply; many plans may not be revised immediately to permit these provisions.
12. Age 72 for Required Minimum Distributions. With respect to traditional IRAs and qualified plans, the mandatory age, minimum distribution requirement has been raised by the Retirement Act from age 70½ to age 72, covering distributions made after December 31, 2019. These provisions apply to individuals who will attain the age of 70 1/2 after this date. We are interpreting this to mean that individuals who reached age 70 ½ on or before December 31, 2019 will remain subject to the age 70 ½ mandatory distribution rules.
Cameron L Hess is a tax and business partner with Wagner Kirkman Blaine Klomparens & Youmans LLP. For any questions regarding tax and business planning, he may be reached at firstname.lastname@example.org.