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Article by: Jeff Skolnick, CPA, M.S. Taxation

On December 20, 2019 President Trump signed into law the SECURE Act and a series of tax extenders. The law has some significant provisions that you should be aware of and I will highlight what I believe to be the most pertinent to most taxpayers.

The following provisions were each disallowed after 2017 but have been reinstated retroactively to 2018 and forward through 2020 by the SECURE Act.

EXCLUSION FROM INCOME FOR DISCHARGE FROM QUALIFIED PRINCIPAL RESIDENCE DEBT

Discharge of debt is considered taxable income unless there is an exception in the law. Prior to the Tax Cuts and Jobs Act taxpayers were permitted to exclude discharge of debt income from qualified principal residence debt from gross income. The exclusion is allowable for up to $2,000,000 of mortgage debt ($1,000,000 if married filing separately).

DEDUCTION FOR MORTGAGE INSURANCE PREMIUMS

Another provision that was extended was the deduction for mortgage insurance premiums. This deduction has a phaseout for taxpayers with an Adjusted Gross Income (AGI) of over $100,000. Once taxpayers reach $100,000 in AGI the deduction is phased out between $100,000 and $110,000 ($50,000 and $55,000 for married taxpayers filing separately).

MEDICAL EXPENSE DEDUCTION SUBJECT TO 7.5% OF ADJUSTED GROSS INCOME IS EXTENDED FOR 2019 AND 2020

As most of you know medical expenses are only allowed as an itemized deduction once they exceed a certain level of AGI. That figure had been 7.5% through 2018. In 2019 this threshold was scheduled to increase to 10%. The 7.5% threshold has been reinstated for 2019 and 2020.

QUALIFIED TUITION AND FEES DEDUCTION 

The above the line deduction for qualified tuition and fees has been restored. This deduction, which occurs above the AGI line on your tax return (meaning you benefit whether you itemize deductions or not) can be as high as $4,000 for taxpayers whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for taxpayers whose AGI does not exceed $80,000 ($160,000 for joint filers). If AGI exceeds the $80,000/$160,000 threshold, then no deduction is allowed.

CHANGES TO THE KIDDIE TAX

Prior to 2018, children with unearned income of more than $2,200 that were under age 18 at yearend,  were 18 but didn’t have earned income that was more than half their support or were full-time students between the ages of 19 and 23 were subject to the Kiddie Tax. Additional conditions were at least one of their parents was alive at the end of the tax year and they were required to file an income tax return that was not a joint return. 

Unearned income is defined in IRS Publication 929 as:

“Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed. It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, certain distributions from trusts, and unemployment compensation. Unearned income includes amounts produced by assets your child obtained with earned income (such as interest on a savings account into which you deposited wages).”

Prior to 2018, if the child had income subject to the kiddie tax it was taxed at the parent’s marginal income tax rate. In other words, the highest rate the parents were paying on their own tax return. In 2018 the law was changed to read the tax would be based on trust tax rates. Trust tax rates is 2018 were 10% for taxable income between $0 and $2,550, 24% for income not exceeding $9,150, 35% for income not exceeding $12,500 and 37% thereafter. By contrast income tax rates for individuals filing jointly in 2018 were 10% on the first $19,050 of taxable income, 12% on income up to $77,400, 22% on income up to $165,000, 24% on income up to $315,000, 32% on income up to $400,000 and so on. Single taxpayer income tax rates were the same rates however the thresholds were 50% of the married filing jointly figures. In other words, the brackets were $9,525, $38,700, $82,500, $157,500 and $200,000.  I didn’t even get into the 35% and 37% brackets. My point here is to show that by using the trust tax brackets, taxpayers reached the higher levels of taxation far quicker than when reporting using their parent’s income tax brackets. The SECURE Act restored the calculation to using parents’ income tax brackets and not trust income tax brackets.

REPEAL OF AFFORDABLE CARE ACT TAXES

The SECURE Act also repealed three health care taxes originally enacted by the provisions of the Affordable Care Act (better know as Obamacare). The taxes repealed were the excise tax on certain high-cost employer plans (know as the Cadillac tax). The medial device tax  and the annual fee on health insurance providers.

New Provisions of the SECURE Act.

Although I cover each of these provisions in more detail in a previous article, I want to highlight the new provisions added by the SECURE Act. Most of these provisions affect the retirement plan arena. These provisions are:

• Elimination of the ability to stretch Required Minimum distributions (RMDs). RMDs are the amount of money required to be withdrawn from retirement accounts once individuals reach a certain age. Generally, this age was 70 ½ (now 72). The amount of required minimum distribution to be taken is based on an individual’s retirement account balance divided by their life expectancy (which is calculated by using IRS tables). If an individual passed away, beneficiaries could use their own ages to stretch the income distributions over a longer period in time. In other words, since a beneficiary may be younger, their life expectancy would be longer, and they were able to take income more slowly and pay the income tax over many years. The new law requires non-spouse beneficiaries (with few exceptions) to take the retirement money within 10 years.

• The age to begin RMDs was raised from 70 ½ to 72 years of age.

• There is no longer an age limit for taxpayers to be allowed to contribute to a traditional IRA. Formerly, taxpayers could not contribute to a traditional IRA after age 70 ½.

• Distributions from retirement plans before age 59 ½ of up to $5,000 for the birth or adoption of a child will not be subject to the 10% early withdrawal penalty.

• Taxpayers are now allowed to take $10,000 as a lifetime maximum from a 529 plan and use it to pay principal and/or interest of a qualified education loan. A taxpayer is also allowed a lifetime $10,000 limit for each sibling in order to pay the principal/interest of a qualified education loan.

• Most retirement plans adopted prior to 2020, although not required to be funded before yearend had to be established before yearend. The new law allows employers to the due date of their income tax returns (including extensions) to establish a retirement plan.

CONCLUSION

The Secure Act provided significant changes to the tax laws affecting individuals. This is a recap of what I feel are the most significant of these changes. There are others that may affect you. Something else to consider is that the extender provisions allow you to amend your 2018 income tax return. I urge you, as always, to consult with a tax professional well versed with the new law.

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