Insight Year-End Tax Law Changes Require Special Attention

As part of the Consolidated Appropriations Act of 2020, Congress passed and the President has signed legislation that contains budget appropriations and avoids a government shutdown. And, typical of year-end legislation, this bill includes a number of tax provisions that could eventually affect many taxpayers.

Among the most significant of the tax law amendments were those related to retirement plans. This part of the bill is referred to as the “Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.” The Act changes the minimum age for requiring distributions from Individual Retirement Accounts from 70 ½ to 72. Thus, taxpayers will be able to hold retirement account balances a little longer for continued growth. However,this taxpayer-friendly provision was offset by a tightening of the rules for distribution of IRA balances upon the owner’s death. Previous law generally allowed those balances to be distributed based on the beneficiary’s lifespan. These “stretch IRAs” have become an important part of many estate plans. The new law continues that policy for spouses. But for most others, it requires a payout within 10 years of the owner’s death. For minor children, the 10-year period is measured from the date of majority of the child. Many estate plans include provisions addressing these “stretch IRAs,” including the use of conduit or accumulation trusts. If your estate includes IRAs, you should be aware of how the new law affects them, and you should contact one of the estate planning attorneys on our team, or your own attorney, for more details.

The SECURE Act also had other important provisions intended to increase the utilization of retirement plans by employees. For instance, the Act has a provision requiring 401(k) plans to offer participation to long-term, part-time employees. The Act has several provisions encouraging automatic enrollment for employees, and it has more flexible provisions allowing early distributions for birth and adoptions. Employers are encouraged to have their plans reviewed to ensure compliance with the new act.

The Consolidated Appropriations Act of 2020 covers a number of other areas that will be of interest to specific sets of taxpayers. It renews or in some cases revives certain tax credits that were set to expire or had already expired, including some encouraging alternative energy production. It eliminates certain taxes imposed by the Affordable Care Act, including the excise tax on high-cost employer-sponsored plans, and the excise taxes on medical devices. It reduces the threshold for itemizing medical and dental expenses from 10% to 7.5% of Adjusted Gross Income. It changes the way in which children are taxed on unearned income (the “kiddie tax”). There are many other changes affecting specific types of taxpayers.

By comparison with the Tax Cuts and Jobs Act of 2017, these tax changes are very modest. But they will nonetheless affect many taxpayers. The changes in the retirement plan area are particularly important, and deserve careful study by taxpayers and their advisors.