The Secure Act of 2019
On December 20th, President Trump signed into law the Secure Act, a funding bill that also included several tax ramifications. The legislation included the renewal of 34 expired or expiring provisions, along with various healthcare tax repeals, changes for not-for-profit organizations, and changes for retirement savings, among other provisions. A few highlights of the bill are discussed below.
The Secure Act brought back the Section 179D deduction for Energy Efficient Commercial Buildings through 2020. This deduction provides qualifying taxpayers the opportunity to accelerate depreciation deductions for commercial buildings that are placed into service before 1/1/2021.The act also extended two deductions that had been left to expire the deduction for mortgage insurance premiums and qualified tuition and fees deduction. Both deductions are available for expenses incurred during 2018 through 2020 for individual taxpayers. These extensions are retroactive to 2018, providing taxpayers the opportunity to amend their already filed 2018 tax returns to include these additional deductions when applicable.
The Secure Act was loaded with various retirement provisions, with one of them repealing the maximum age for contributions to traditional IRA’s. The previous age limit was 70.5. The new rule allows taxpayers with earned income to contribute to traditional IRA’s and also provides an option to implement a backdoor Roth IRA if their income is too high for the traditional Roth IRA for taxpayers over 70.5.
An additional minor benefit is that required minimum distributions now start at age 72 instead of age 70.5. One drawback is that individuals that turned 70.5 before December 31, 2019 are not eligible for this extension (and must begin required minimum distributions).
The act did remove stretch IRA’s for non-spouse inherited IRA’s these beneficiaries are now required to take distributions over 10 years instead of the beneficiary’s lifetime. There is no requirement to take distributions during the first 9 years, rather, the account must be emptied by the end of the 10th year. Beneficiaries who receive these IRA’s (typically children and grandchildren) should perform a tax analysis on appropriate timing of the distributions to minimize the tax impact. For traditional IRA’s, a lump sum distribution may cause a jump to a high tax bracket, so the distributions should be made in years where the taxable income is low. Roth IRA’s could be held to year 10 to maximize as much tax-free growth as possible.
One final provision allows up to $5,000 to be distributed from IRAs penalty-free for childbirth or adoption expenses. The distributions must be taken within one year of the birth or the adoption and each parent can withdraw the $5,000 or $10,000 in total without the 10% early withdrawal penalty applying.
Kiddie tax has now reverted to the rules before the Tax Cuts and Jobs Act that required the Kiddie Tax be calculated utilizing trust tax rate tables. This change applies to 2020 and future years and can also be elected to apply retroactively to 2018 and 2019. Taxpayers who paid Kiddie Tax in 2018 should perform an analysis if the tax could be reduced by filing an amended return using the “old” rules and tax rates.
Taxpayers with 529 plans can now use these funds to pay down student loans. There is a $10,000 lifetime limit per beneficiary. The same 529 plan can be used to pay down $10,000 of debt for siblings of the beneficiary. If 529 funds are used to pay student loan interest, then that taxpayer cannot claim the interest expense deduction. If taxpayers plan to make student loan payments, it may be advisable to first contribute to a 529 plan, and then take a distribution to make the payments
It is unclear if Iowa will follow the provisions put in place under the SECURE Act at this time related to the student loan payments.
What Was Not Included
Unfortunately, the Secure Act does not address drafting errors made when the TCJA was signed into law. For example, the error related to the depreciable life of Qualified Improvement Property was not addressed. Taxpayers will have to continue to wait for a patch to correct this drafting error.