insight magazine

What’s New for the Next Tax Season?

2020 was a year of legislation with significant tax implications—here are the biggest changes that may impact your clients in the coming tax filing season. By Daniel F. Rahill, CPA, JD, LL.M., CGMA | Winter 2020

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To characterize the past year as one of change would be an understatement. At the beginning of 2020, we might have guessed that the Setting Every Community Up for Retirement Enhancement (SECURE) Act would be the big tax story. A major overhaul of the rules for retirement plans and IRAs, this act was designed to encourage savings and make it easier for employers to offer retirement plans.

But everything changed with COVID-19’s arrival, shutting down the country and sending the economy into a recession. By the end of March, Congress had passed three COVID-19 relief packages, most importantly the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These stimulus packages were designed to absorb some of COVID’s impact on individuals, businesses, nonprofits, and state and local governments via tax, grant, and loan provisions. Of course, a number of significant tax implications accompany these subsidies. Here are the most important legislative changes to be aware of heading into the 2021 busy season.

The SECURE Act's Big Impacts

Maximum Age Repealed for Traditional IRA Contributions
The act ends the age restriction on contributions to a traditional IRA once the individual has attained the age of 70.5. Therefore, taxpayers with earned income can make IRA contributions at any age beginning in 2020.

Age Increased for Required Minimum Distributions
Under previous law, participants were generally required to begin taking distributions from their retirement plans at age 70.5. The new law increases the required minimum distribution age to 72 for people who turn 70.5 after Dec. 31, 2019.

Penalty-Free Withdrawals Permitted for Birth or Adoption
While the previous law exempted certain distributions from qualified plans from the 10 percent tax penalty on early withdrawals prior to age 59.5, the new law includes qualified birth or adoption distributions as qualifying for such penalty-free withdrawals.

Annuity Portability Options Expanded
The legislation permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA.

Allowable 529 Plan Withdrawals Expanded
The new law expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.

Part-Time Worker Participation in 401(k) Plans Required
Except in the case of collectively bargained plans, the new law requires employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either the one-year-of-service requirement (with a 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Start-Up Costs Credit Increased for Small Business Owners
Prior to the new law, small businesses could claim a credit equal to 50 percent of the start-up costs of a qualified plan, up to a maximum of $500. The new law increases the credit limit to a maximum of $5,000 for each of the first three years effective for 2020 and later years.

Automatic Enrollment Credit Created
To encourage greater employee participation in qualified retirement plans, the act creates a new tax credit of up to $500 per year to employers to defray start-up costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under previous law and will be available for three years. It will also be available to employers that convert an existing plan to an automatic enrollment design.

Stretch IRA Required Minimum Distributions Established
Under the new law, “stretch” IRA distributions to individuals other than the account owner’s surviving spouse or minor child, disabled or chronically ill individuals, or individuals who are less than 10 years younger than the account owner are generally required to be distributed within 10 years of the account owner’s death.

Other Non-Retirement Tax Law Changes Enacted
The act repeals excise taxes on high-cost employer-sponsored health coverage (“Cadillac” plans), the medical device tax, and the fee on health insurance providers. In addition, the estate and trust tax rates applied to certain unearned income of children (the “kiddie tax” provision) have been changed to the parents’ tax rate. Finally, a number of expired tax provisions were extended through 2020, including the 7.5 percent (instead of 10 percent) adjusted gross income floor for medical expense deductions and the above-theline deduction for qualified tuition and related expenses.

Reacting to the Families First Coronavirus Response Act

Payroll Tax Credit Established for Emergency Sick Leave
The act requires all public and private employers with fewer than 500 employees to provide those employees two weeks of paid sick time. To help small and medium-sized businesses cope with the impact of the legislation, the relief bill contains several payroll tax credits for employers. Subject to certain limitations, the act provides an employer payroll tax credit equal to 100 percent of the qualified sick leave wages paid by the employer.

Payroll Tax Credit Established for Emergency Family Leave
Subject to certain limitations, the act provides an employer payroll tax credit equal to 100 percent of the qualified family leave wages paid by the employer. The credit is available for eligible wages paid through Dec. 31, 2020. The credit is generally available for up to $200 in wages for each day an employee receives qualified family leave wages. A maximum of $10,000 in wages per employee would be eligible for the credit.

Navigating the CARES Act

Economic Impact Payments Distributed
The act includes relief in the form of immediate cash payments of as much as $1,200 for single taxpayers, $2,400 for married joint filers, plus $500 for each dependent child under the age of 17. They are reduced for higher income taxpayers, with phase-outs beginning at $75,000 for single taxpayers and $150,000 for married joint filers, and do not apply for single taxpayers with incomes exceeding $99,000 and married joint filers with no children and incomes exceeding $198,000.

The payments are treated as advance refunds of a 2020 tax credit. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they received. This means individuals who did not receive the full amount they were entitled to can claim the difference as a credit on their 2020 return.

Retirement Account Rules Relaxed
The act temporarily waives required minimum distribution requirements for 2020. This permits those who do not need immediate funds to avoid cashing out investments at depressed values. For individuals qualifying for coronavirus-related distributions as defined below, the 10 percent early withdrawal penalty is waived for distributions up to $100,000 in 2020. In addition, income from such distributions would be subject to tax over three years and the taxpayer may recontribute to an eligible retirement plan within three years without regard to the annual cap.

Individuals qualifying for coronavirus-related distributions also have increased borrowing capabilities against their retirement assets. The maximum amount of loans (when combined with existing loans) which can be taken from retirement accounts is the lesser of $100,000 (up from $50,000) or 100 percent of the participant’s accrued benefit (up from 50 percent). Repayment of these loans may be delayed for up to one year. This change will be in effect through 2020.

Student Loan Relief Provided
A provision in the act provides a temporary income tax exclusion for individuals who get student loan repayment assistance from their employer. Through Dec. 31, 2020, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.

Charitable Deduction Limits Relaxed
Taxpayers who do not otherwise elect to itemize deductions are allowed an above-the-line deduction of up to $300 for charitable contributions made in cash (not stock), excluding donor-advised funds. For individuals who itemize, as well as corporations, the act temporarily increases limitations on deductions for charitable contributions made in 2020. For individuals, the 60 percent of adjusted gross income limitation is suspended for 2020. For contributions of food inventory, the limitation is increased from 15 percent to 25 percent. Excess contributions may be carried forward to future years based on the existing charitable contribution carryforward rules.

There are signs that the 2021 tax season will be just as challenging as the 2020 season, but with the knowledge we gained then as well as foresight and planning, we will rise to that challenge.

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