In the spirit of giving during the holiday season, a package of tax provisions passed by Congress could be significant for some taxpayers. The Further Consolidated Appropriations Act of 2020 was signed into law by President Trump on December 20th, 2019. While the primary purpose of the bill is to appropriate federal budget among various departments and programs for 2020, the Act also includes several tax law changes that will provide significant tax benefits for some taxpayers. The Act also includes a retirement-related law titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Here’s a rundown of some provisions in the two laws
Changes to IRA and 401(K) rules offer greater flexibility for some
The short summary of the significant changes to the rules related to traditional IRAs is that for 2020, 72 is now the magic number. Currently, an individual can’t make regular pre-tax contributions to a traditional IRA in the year he or she reaches age 70½ and older. Under the new rules, the age limit for traditional IRA contributions is raised from age 70½ to 72. Additionally, the age to take required minimum distributions (RMDs) is also going up from 70½ to 72.
What didn’t increase, however, is how much a taxpayer can contribute. As of now, the IRA contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (the same as 2019 limit).
Some potentially bad news on IRA changes is that the distribution period for non-spouse inherited IRA will now be capped at a 10-year maximum. This new 10-year cap may be significant for some taxpayers looking to delay taxable distributions from an inherited IRA.
The SECURE Act also made some changes to 401(K) plan requirements. The new rules move to promote more employee participation by encouraging auto-enrollment, and also includes a new tax credit for small employers using auto-enrollment plans. Additionally, some plan sponsors may now be required to offer participation to long-term, part-time employees.
Some taxpayers might be able to itemize their medical expenses again
For 2019, under the Tax Cuts and Jobs Act (TCJA), only medical and dental expenses greater than 10% of your adjusted gross income (AGI) qualify as itemized tax deductions for schedule A. This floor makes it difficult to claim a write-off unless you have very high medical bills or a low income (or both). In tax years 2017 and 2018, this “floor” for claiming a deduction was 7.5%. Under the new law, the lower 7.5% floor returns through 2020. Keep in mind, however, deductible expenses for medical and dental remain as itemized deductions so even with the potential increase, a taxpayer will still need significant itemized deductions that exceed the annual standard deduction to receive any potential tax benefit. For 2020, the standard deduction is set at $12,400 for single, and $24,800 for married couples filing jointly.
If you’re paying college tuition, you may (once again) get a valuable tax break
Before the TCJA, the qualified tuition and related expenses deduction allowed taxpayers to claim a deduction for qualified education expenses without having to itemize their deductions. The TCJA eliminated the deduction for 2019 but now it returns through 2020. The deduction is capped at $4,000 for an individual with an AGI less $65,000 or $2,000 for a taxpayer with an AGI that doesn’t exceed $80,000. Depending on your situation, there are other education tax breaks that were not touched by the new law that may be more valuable for you.
More info is coming
These are only some of the provisions in the new laws. We’ll be writing more about them in the near future. In the meantime, contact your Wegner CPAs tax expert for more information on how these new law changes may help you in 2020.