Top 10 Tax Changes for 2020
The Tax Cut and Jobs Act (the “Tax Act”) enacted at the end of 2017 produced extensive changes to tax rates and deductions for both businesses and individuals. In addition, the recently enacted Setting Every Community Up for Retirement Enhancement Act (the “SECURE” Act) produced sweeping retirement changes. These two acts have widespread implications on your 2019 tax return. If you have any questions about the effect of these tax changes on your personal situation, please contact us at 407-629-6477.
- Mandatory Health Insurance Tax Removed. Effective January 1, 2019, the Individual Shared Responsibility Payment Mandate, which previously assessed a penalty on individuals without health insurance, was removed. If applicable, the penalty was calculated on an individual’s federal tax return and paid with their taxes. The penalty was the larger of $695 per adult ($2,085 per family) or 2.5% of annual income. When filing your 2019 tax return in 2020, there will be no penalty. Although removed on the federal tax return, some states, such as California, Massachusetts, New Jersey, Vermont, and Washington DC, still have their own individual health insurance mandate penalty.
- Elimination of the Stretch IRA. Effective January 1, 2020, the SECURE Act eliminated the Stretch IRA, which previously allowed most non-spousal beneficiaries to stretch the required minimum distributions (RMD) from an inherited retirement account over their own life expectancy. The SECURE Act requires non-spousal beneficiaries to withdraw all assets from an inherited account within 10 years of the deceased’s death. Beneficiaries no longer have minimum distribution amounts required each year but can instead withdraw the balance at their discretion until it must be liquidated in the 10th year. This change will not only accelerate distributions, but also accelerate the associated income taxes. This was a truly unfavorable change in the tax law and effectively eliminated one the most powerful and flexible estate planning tools that was previously enacted.
- Required Minimum Distribution (RMD) Age Raised and Age Restriction for IRA Contributions Eliminated. The SECURE Act increased the RMD age for IRAs from 70 ½ to 72. The SECURE Act did not change the age for Qualified Charitable Distributions (QCD), which remains at 70 ½. Any QCD made between age 70 ½ and 72 are considered non-taxable on your tax return and may reduce your future RMD since the IRA balance decreases from the distributions. Additionally, the SECURE Act removed the age restriction of 70 ½ for IRA contributions for taxpayers that are still working. This also applies to spousal IRAs. Thus, if at least one spouse is working after age 70 ½, both spouses can continue to make IRA contributions and receive a potential tax deduction.
- Higher Contribution Limits for 401(k)s, 403(b)s, 457s, Simple IRAs, IRAs & HSAs. The contribution limits to retirement accounts increases for 2020. For 401(k)s, 403(b)s and 457s the limit increases from $19,000 to $19,500. For those over age 50, the catch-up contribution limit increased to $6,500 allowing for a maximum possible contribution of $26,000 for 2020. The limit for SIMPLE IRAs increases from $13,000 to $13,500 with the over age 50 catch up contribution staying at $3,000. The annual limit on Traditional IRAs and Roth IRAs remains the same at $6,000 for 2020. The age 50 catch-up contribution remains at $1,000 for these accounts. The Health Savings Account limits also increases from $3,500 in 2019 to $3,550 in 2020 for individual plans while family plan contribution limits increase from $7,000 to $7,100. In addition, HSA account holders age 55 and older may contribute an extra $1,000 annually. These increases reflect inflation adjustments on the contribution limits and allow tax payers to save more.
- Qualified Business Income Deduction (199A) for Rental Properties. The Qualified Business Income Deduction (QBID) allowed owners of sole proprietorships or pass through entities to take a 20% deduction on qualified business income. With one year under their belt, the IRS has increased their scrutiny towards taxpayers taking this deduction, especially for rental real estate. The IRS released a renal real estate safe harbor, which requires taxpayers to keep separate records for the rental real estate business and perform at least 250 hours of rental services per year, to be able to utilize the deduction on their 2019 tax return. The taxpayer must keep contemporaneous records that detail the hours, dates, and description of services performed. Typical rental services include: advertising to rent, collecting rent, performing daily operations including lawn services, maintenance, and repairs, and managing the property. These activities can be performed by you, your employees, outside services, or independent contractors. In order to take the QBID on a rental real estate business, you must sign an election under penalties of perjury certifying that you meet the requirements for the rental real estate safe harbor.
- Alimony Payments and Divorce Agreement Modifications. Divorce or separation agreements executed after December 31, 2018 exclude alimony payments from the tax return entirely. To facilitate proper reporting under the new regulations, taxpayers are now required to indicate date of divorce on their 2019 tax return when reporting alimony. If a divorce or separation agreement executed prior to December 31, 2018 is modified, it may trigger use of the new tax treatment depending on the changes made. If you previously received a deduction for alimony payments and had a material modification to your divorce agreement in 2019, you may not be entitled to the deduction moving forward.
- Higher Medical Expense Deduction Threshold Averted. The medical expense deduction threshold was supposed to increase from 7.5% to 10%. Fortunately, the SECURE Act extended the lower threshold of 7.5% for 2019. Taxpayers can still deduct unreimbursed medical expenses but only if the expenses exceed 7.5% of adjusted gross income on their 2019 tax return and only if they itemize their deductions.
- 529 Education Savings Plan. One of the Tax Cuts and Jobs Acts changes now allows distributions from 529 Plans to be used to pay up to $10,000 of tuition each year at an elementary or secondary (K-12) public, private or religious school. Additionally, the SECURE Act allows for 529 Plan distributions to pay for student loan payments and the cost of apprenticeship programs up to $10,000 per plan. 529 Plans previously only offered tax-advantaged savings for qualified higher-education expenses. Contributions up to $15,000 are eligible for the gift-tax annual exclusion ($30,000 combined gifts for couples).
- Capital Gains & Dividend Tax Rates. The Net Investment Income Tax of 3.8% on dividends and capital gains remains. This additional tax applies to investment (unearned) income for single filers with income above $200,000 and married filers with income above $250,000. Investment income includes dividends, interest, rents, royalties and capital gains. The capital gains and qualified dividend rates remain at 0%, 15%, or 20% dependent on income and marital status.
- Form Changes. On the 2018 tax return, the IRS removed over 50 lines from the face of Form 1040 in efforts to simplify the tax return for individuals. Consequently, most of the 50 lines were then picked up on six new schedules. On the 2019 tax return, the IRS has reduced the number of schedules from six to three. Some of these items have been moved back to the face of Form 1040, while other items have been grouped together and/or renamed. Additionally, the IRS released a draft version of Form 1040-SR, which will be available for taxpayers age 65 and older. Essentially, it is a simplified income tax form with larger font and predominately displayed charts. Form 1040-SR was created to help seniors who file their tax returns on paper instead of electronically.