2020 Spending Bill Extends Tax Breaks, Adds Retirement Account Provisions
Congress has reached an agreement on a massive spending package titled the Further Consolidated Appropriations Act, 2020. The agreement also includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Together, the two laws could have substantial impact for tax, retirement and estate planning.
At the end of 2019, Congress has engaged in a flurry of activity. Most notably, it reached agreement on a massive government-wide spending package titled the Further Consolidated Appropriations Act, 2020. The legislation extends certain income tax provisions that had expired, as well as some that were due to expire at the end of 2019.
Congress traditionally passes so-called “extenders” annually, but it neglected to do so for 2018. As a result, several popular breaks for both individuals and businesses expired at the end of 2017. To the surprise of some, the agreement also includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The law, which had been mired in the Senate since the House of Representatives passed it by a 417-3 vote in May 2019, is the first significant retirement-related legislation since the Pension Protection Act of 2006. Together, the two laws could have substantial repercussions for tax, retirement and even estate planning.
Extended tax breaks
Among others, the new legislation extends the following tax provisions, some of which were established on a temporary basis by the Tax Cuts and Jobs Act (TCJA), through 2020:
Qualified medical expenses include payments to physicians, dentists and other medical practitioners, as well as for certain equipment (including glasses, contacts and hearing aids), supplies, diagnostic devices, and prescription drugs. Travel expenses related to medical care are deductible, too.
If you’re expecting to incur medical expenses early in 2020, you may now find it worthwhile to expedite, if possible, those costs into 2019 to qualify for the deduction on your 2019 income tax return or increase your 2019 deduction.
The new law provides a $5 billion allocation for the credit for 2020 and extends for one year, through 2025, the carryover period for unused credits (that is, carrying over from years in which the credit amount exceeds the taxpayer’s tax liability). In certain circumstances, the NMTC can enhance the tax benefits of investing in empowerment zones.
The amount of the credit begins at 12.5% of wages paid if the leave payment rate is at least 50% of the normal wage rate. The percentage rises incrementally by 0.25 percentage points as the rate of leave payment exceeds 50%, with a maximum credit of 25% when full wages are paid for the leave.
The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.
Changes to retirement plans
The SECURE Act is packed with more than two dozen provisions primarily intended to encourage saving for retirement. Most of the provisions take effect January 1, 2020. They include measures affecting both individuals and businesses.
For example, under current law, individuals are prohibited from contributing to traditional IRAs after they reach age 70½, regardless of whether they’re still working. The SECURE Act eliminates that restriction so that anyone can contribute as long as they’re working, matching the existing rules for 401(k) plans and Roth IRAs.
The SECURE Act raises the age at which taxpayers generally must begin to take their required minimum distributions (RMDs) from 70½ to 72. The new rule applies only to those individuals who haven’t reached the age of 70½ by the end of 2019.
The law also includes a new exemption from the 10% tax penalty on early withdrawals from retirement accounts. Taxpayers can withdraw an aggregate of $5,000 from a plan without penalty within one year of the birth of a child or an adoption becoming final.
Less favorably for individual taxpayers, the SECURE Act eliminates the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies. This allowed younger beneficiaries to take smaller distributions while growing the accounts and deferring taxes.
Now, most nonspouse beneficiaries must take their distributions over a 10-year period beginning on the deceased’s death. That could increase the tax burden by pushing the distributions into years when the beneficiary is working and in higher tax brackets. The change, therefore, could require some modifications to estate plans, particularly if the plans include trustee-managed inherited IRAs with guardrails to prevent young beneficiaries from quickly draining the accounts.
On the business side, the SECURE Act expands access to open multiple employer plans (MEPs). MEPs give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties. It also provides tax credits to employers for starting retirement plans and automatically enrolling employees.
In addition, the new law paves the way for employers to include annuities in their retirement plans by eliminating their potential liability when it comes to selecting the appropriate annuity plans. And the SECURE Act requires employers to allow participation in their retirement plans by part-time employees who’ve worked at least 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours.
The extension of tax breaks that were thought to have expired at the end of 2017 when filing federal income tax returns for the 2018 tax year means that some taxpayers should consider filing amended returns for the year. Changes to the laws for retirement savings may require a rethinking of both retirement and estate planning. We can help you chart the best course to reduce your taxes and maximize your and your heirs’ financial cushions under current law. Contact us, today.