The Further Consolidated Appropriations Act, 2020, signed into law on December 20, 2019, extended a number of expired tax provisions for business and individuals through 2020. It also included several retirement plan changes and repealed three health care taxes. Here’s what you need to know:
Individual Tax Extenders
Mortgage Insurance Premiums. Homeowners with less than 20 percent equity in their homes are required to pay mortgage insurance premiums (PMI). For taxpayers whose income is below certain threshold amounts, these premiums were deductible in prior tax years as well as now being extended through 2020. Mortgage insurance premiums are reported on Schedule A (1040), Itemized Deductions, under “Interest You Paid.”
Exclusion of Discharge of Principal Residence Indebtedness. Typically, forgiven debt is considered taxable income in the eyes of the IRS; however, homeowners whose homes have been foreclosed on or subjected to short sale are able to exclude from gross income up to $2 million of canceled mortgage debt. This tax provision has been extended through 2020.
Qualified Tuition and Expenses. The deduction for qualified tuition and fees was also extended through 2020 and is an above-the-line tax deduction. In other words, you don’t have to itemize your deductions to claim the expense. Qualified education expenses are defined as tuition and related expenses required for enrollment or attendance at an eligible educational institution. Related expenses include student-activity fees and expenses for books, supplies, and equipment as required by the institution.
Taxpayers with income of up to $130,000 (joint) or $65,000 (single) can claim a deduction for up to $4,000 in expenses. Taxpayers with income over $130,000 but under $160,000 (joint) and over $65,000 but under $80,000 (single) are able to take a deduction of up to $2,000. Taxpayers with incomes above these threshold amounts are not eligible for the deduction.
Medical Expense Deduction Threshold. The 7.5 percent of adjusted gross income floor for the deduction of medical expenses was scheduled to revert to 10 percent but is extended through tax year 2020.
Energy Saving Home Improvements. This nonbusiness energy property improvement credit is worth up to 10 percent of the cost (excluding installation) of qualified improvements to a taxpayer’s main home to make it more energy-efficient such as insulation materials, energy-efficient exterior windows and doors, and certain types of roofs, e.g., metal roof or asphalt roofs specifically designed to reduce the heat gain of your home. This credit reduces the amount of tax owed as opposed to a deduction that reduces your taxable income.
This tax credit is cumulative and has been around for more than 10 years. As such, if you’ve taken the credit in any tax year since 2006, you will not be able to take the full $500 tax credit this year. For example, if you took a credit of $150 in 2016, the maximum credit you could take this year (2017) is $350.Furthermore, taxpayers should also note that they can only use $200 of this limit for windows.
Credit for Health Insurance Costs of Eligible Individuals. The Health Coverage Tax Credit (HCTC), a Federal tax credit administered by the IRS, and has been extended for all coverage months beginning in 2020. As such, eligible individuals can receive a tax credit to offset the cost of their monthly health insurance premiums for 2020 if they have qualified health coverage for the HCTC. Please note that a qualified health plan offered through a Health Insurance Marketplace is not qualified coverage for the HCTC.
Business Tax Extenders
The following business-related tax credits and provisions were extended through 2020 as well:
Work Opportunity Tax Credit. Extended through 2020, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.
Employer Credit for Paid Family and Medical Leave. Employers who provide paid family and medical leave to their employees may claim a credit for tax years 2018, 2019, and 2020. The Employer Credit for Paid Family and Medical Leave is a business credit based on a percentage of wages paid to qualifying employees while they’re on family and medical leave.
Certain Provisions Related to Beer, Wine, and Distilled Spirits. Under the Craft Beverage Modernization and Tax Reform Act of 2019, certain provisions, which expired at the end of 2019, have been extended through 2020, including reduced excise taxes for brewers, small distilleries, and small wine producers, as well as extending the exemption for the aging period of beer, wine, and spirits from certain capitalization rules.
Retirement Plan Changes
The Further Consolidated Appropriations Act, 2020 included the SECURE (Setting Every Community Up for Retirement) Act, which went into effect on January 1, 2020, and includes major changes for 401(k) plans and IRAs. Some of the highlights are listed below:
- Increase in the age for required minimum distributions (RMDs) to the year a taxpayer turns age 72. Applies to IRAs and 401(k) plans. Please note, however, that the age for qualified charitable distributions remains age 70 1/2.
- Penalty-free withdrawal from IRA for amounts up to $5,000 for birth or adoption of a child.
- Age restriction for contributions to IRAs is eliminated. Prior to the SECURE Act, the age limit was 70 1/2. There is no age restriction for Roth IRA contributions.
- Long-term, part-time employees, age 21 and older who work at least 500 hours per year for three consecutive years are now able to participate in an employer’s 401(k) plan.
- Distribution periods for non-spouse inherited IRAs are limited to a 10-year maximum and all money must be withdrawn within that time period. Individuals who inherited an IRA prior to 2020 are still subject to the old rules.
- Certain home healthcare workers are now able to contribute to a defined contribution plan or IRA.
- Credit limitation for small employer pension plan start-up costs increases to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.
- New small employer automatic enrollment credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment.
Health Care Taxes Repealed
Three health care-related taxes enacted to fund the Affordable Care Act were repealed. In prior years, the three taxes had been delayed or suspended.
- Medical device excise tax
- Annual fee on health insurance providers
- Excise tax on high cost employer-sponsored health coverage (“Cadillac tax”)
Don’t Miss Out
Tax law is complicated, but help is just a phone call away. If you have any questions, don’t hesitate to contact the office.
Another New Design for Form 1040
The new 2019 Form 1040, which was redesigned last year to be “postcard-sized” has been revised yet again. As with last year’s design, the form gathers information about the taxpayer(s) and dependents. It is also the form you need to sign and date when filing your return. New for this year, taxpayers aged 65 and older may be able to use Form 1040-SR (see below for more information).
More complex tax situations will generally require using one or more of the supplemental schedules that were also new for 2018, but which for 2019, have been consolidated into three schedules (Schedules 1, 2, and 3). Of note, is that the 2018 Schedule 6, Foreign Address and Third Party Designee, has been incorporated into the Form 1040.
As in 2018, Forms 1040A and 1040EZ no longer exist. Instead, taxpayers should use Form 1040 or Form 1040-SR.
Virtual Currency Questions
For the 2019 tax year, taxpayers who engaged in a transaction that involved virtual currency (e.g., Bitcoin and Ether) will need to file Schedule 1, Additional Income and Adjustments To Income. Taxpayers are reminded to maintain records that support any information provided on their tax returns such as records documenting receipts, sales, exchanges or other dispositions of virtual currency and the fair market value of the virtual currency.
While more than nine out of 10 refunds are issued in less than 21 days, some tax returns require additional review and take longer to process than others. This may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud.
Furthermore, tax law requires that the IRS hold refunds on tax returns claiming the Additional Child Tax Credit (ACTC) or Earned Income Tax Credit (EITC) until mid-February – even the portion not associated with the EITC or ACTC. Even so, most of these types of refunds are expected to be available in taxpayer bank accounts or on debit cards by the first week of March as long as the taxpayer chose direct deposit and there are no other issues with the tax return.
As a reminder, once refunds are issued by the IRS there may be additional time for processing by financial institutions, which must accept and deposit the refunds to bank accounts and products. Typically, refunds and payments are not processed on weekends or holidays, which can affect when refunds reach taxpayers. Refund information will generally be available within 24 hours after the IRS acknowledges receipt of an electronically filed return.
Tax Filing Deadline
For most taxpayers the filing deadline to submit 2019 tax returns is Wednesday, April 15, 2020; however, there’s no better time than right now to begin gathering information needed to prepare your tax return.
If you have any questions about the new tax forms or need assistance preparing and filing your tax return, help is just a phone call away.