Massive Tax Measure Impacts Prior, Present, and Future Taxes

A domestic spending package, called the Further Consolidated Appropriations Act, 2020 (H.R. 1865) which was signed into law on December 20, 2019, makes $426 billion in tax cuts. Here is a brief overview of the key changes impacting individuals (the measure also contains numerous business-related changes not discussed here).

Extenders. Many individual income tax breaks expired at the end of 2017. The new law extends them retroactively to 2018; they apply as well for 2019 and 2020. These include:

• Above-the-line deduction for tuition and fees.
• Mortgage insurance premiums treated as part of the itemized deduction for mortgage interest.
• Exclusion of income from the cancellation of certain home mortgage debt.
• Tax credit for certain home energy improvements.

Retirement plans. The provisions contained in the Setting Every Community Up for Retirement Enhancement (SECURE) Act were enacted as part of this spending measure. The changes take effect in 2020, except as noted. They include:

• Removing the age cap on making contributions to traditional IRAs.
• Increasing the age to 72 for beginning required minimum distributions, for those reaching age 70½ after 2019.
• Changing the payout rule for most beneficiaries of retirement plans and IRAs where the account owner dies after 2019, by requiring the amount to be entirely distributed by the end of 10 years (rather than spreading distributions out over the beneficiaries’ life expectancy).
• Allowing penalty-free withdrawals up to $5,000 from 401(k) plans for birth or adoption expenses.
• Allowing tax-free distributions up to $10,000 from 529 plans to pay off student loans.
• Treating difficulty of care payments to home health care workers as compensation for purposes of contributing to a retirement plan or IRA.
• Treating stipends and non-tuition fellowship payments as compensation for purposes of making IRA contributions.
• Allowing penalty-free qualified disaster distributions from retirement plans up to $100,000 (distributions received before June 17, 2020 for losses suffered in disasters that began after 2017 and ended by January 19, 2020, provided the disaster was declared by February 18, 2020).

Other measures. Various other tax rules were changed, including:

• Restoring the 7.5%-of-adjusted-gross-income floor for itemized medical expenses through 2020.
• Reverting the kiddie tax rules to pre-Tax Cuts and Jobs Act status. This means that investment income over a threshold amount is taxed to a child using the parent’s top marginal rate (rather than basing the tax on rates for trusts and estates).
• Repealing the “Cadillac tax” on high-cost health plans that was set to go into effect in 2022.