New Tax Provisions Included in 2020 Budget Deal

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Rödl & Partner Tax Matters Vol 2019 – 8, published in December 2019

 

On December 17th, Congress passed a budget compromise that included numerous tax updates and changes. The President is expected to sign the legislation.

 

What Tax Changes Are Included in the Budget?

Changes Impacting Businesses:

 

The following provisions have expired or were set to expire at the end of 2019 and are now extended through 2020:

  • Look-through rule for controlled foreign corporations (“CFCs”);
  • New Markets Tax Credit;
  • Employer tax credit for paid family and medical leave;
  • Certain tax credits related to alternative and renewable energy;
  • Section 179D deduction for energy-efficient commercial buildings;
  • Disaster tax relief for taxpayers located areas in the U.S. exposed to certain natural disasters during 2019;

 

The following provisions have been permanently REPEALED:

  • “Cadillac” excise tax on certain employer-provided health insurance scheduled to go into effect in 2020;
  • Medical device tax;
  • Health insurance industry tax scheduled to go into effect in 2020.

 

Changes Impacting Individuals:

 

The following provisions have expired or were set to expire at the end of 2019 and are now extended through 2020:

  • Tax credit for health insurance costs for certain individuals;
  • Adjusted gross income threshold for deduction of medical expenses is 7.5% rather than 10% through 2020;
  • Certain tax credits related to alternative and renewable energy;
  • Treatment of qualified residential mortgage insurance premiums as deductible mortgage interest;
  • Deduction of qualified tuition expenses;
  • Disaster tax relief for taxpayers located in areas of the U.S. exposed to certain natural disasters during 2019.

 

Changes Impacting both Businesses and Individuals:

 

The year-end budget legislation includes the Setting Every Community Up for Retirement Enhancement (“SECURE”) legislation. Provisions in SECURE apply to tax years beginning after 2019 and include the following:

  • The 5-year rule for required minimum distributions (“RMD”) is replaced with a 10-year window. The new window applies regardless of whether the participant or IRA owner dies before or after reaching the required beginning date. This change effectively eliminates (or severely limits) the use of “stretch IRAs” as an effective planning tool. Some limited exceptions are available.
  • RMD beginning date for employer plans and for IRAs is moved from age 70 ½ to the year when the owner reaches age 72.
  • An exception to the 10% early withdrawal penalty is added for the birth or adoption of a child. Qualified distributions under this exception can be recontributed to the individual’s applicable eligible retirement plan under certain requirements.
  • The maximum age limitation of 70 ½ for individuals to contribute to an IRA is eliminated.
  • Employers with 401(k) plans must offer employees who work between 500 and 1000 hours a year an additional way to participate in the 401(k) plan. Employees must be able to satisfy participation requirements by completing either:
    • A one year of service requirement under the 1,000-hour rule, or
    • Three consecutive years of service where the employee completes at least 500 hours of service.

Employers with collectively bargained plans are not required to have the 500-hour track.

  • Certain safe harbors are adjusted. The deferral amount for automatic enrollment safe harbor is raised from 10% of compensation to 15%.
  • Additional provisions make it easier for smaller employers to offer retirement plans to their employers.  The small-employer pension plan tax credit is increased, and a new tax credit of $500 is allowed per year to eligible employers for three consecutive years if it adds an automatic enrollment feature to a qualified plan. Additionally, a new class of Multiple Employer Plan (“MEP”) service provider can be created to pool employer plans.  

 

What Changes were NOT in the Budget?

 

Tax practitioners were hopeful that the package would include technical corrections to the Tax Cuts and Jobs Act (“Tax Reform”). Most notably, the correction needed to allow bonus depreciation for Qualified Improvement Property (“QIP”) was not passed, requiring this property to be depreciated using the 39-year straight-line depreciation method.  

 

Individuals hopeful that the package might include the “SALT CAP” increase to $20,000 for deduction of state and local taxes will be disappointed that this package did not include this legislation. While separate legislation may be passed on this provision by the House before 2019 ends, the Senate has indicated they will not be voting on this bill in 2019.

 

Additionally, some tax credits sought by Democrats were absent from the final bill. Those include solar energy credits and an expansion of an electric car credit.   

 

If you have any questions, please contact your Rödl & Partner representative.

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