Ten Top Provisions in the SECURE Act
New law creates retirement tax breaks
Late in 2019, Congress passed the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act, the biggest retirement law in more than a decade. Most provisions in this new legislation went into effect on January 1, 2020. Following is a summary of ten key changes.
1. Stretch IRAs: Generally, the new law favors taxpayers, but it does close a tax loophole that allowed non-spousal beneficiaries of IRAs and defined contribution plans like 401(k)s to “stretch” required minimum distributions (RMDs) over their life expectancies. Now funds must be distributed to non-spousal beneficiaries within ten years of the account owner’s death, unless an exception applies. The exceptions are for surviving spouses, disabled or chronically ill individuals, children who have not yet reached the age of majority and individuals not more than ten years younger than the account owner.
2. RMD starting age: Previously, qualified plan and IRA participants had to start taking RMDs in the year after the year they turned age 70½. The SECURE Act pushes back the starting date to the year after the year in which you turn age 72.
3. IRA contributions: The tax law had prohibited individuals from contributing to a traditional IRA after reaching age 70½. This age restriction has been removed.
4. Plan start-up credits: Under prior law, a small business could claim a tax credit equal to 50% of the start-up costs of a qualified plan, up to a maximum of $500. The new law increases the credit under a new formula with a maximum of $5,000.
5. Automatic enrollment credits: The new law also creates a brand-new credit of up to $500 per year for employers that automatically enroll 401(k) and SIMPLE participants. This credit is only available for a three-year period.
6. Part-time workers: In the past, employers could exclude part-time workers working fewer than 1,000 hours per year from participating in their 401(k) plans. But the new law opens up plans to employees who have completed three consecutive years of at least 500 hours of service.
7. Annuity options: The new law requires 401(k) plan administrators to provide annual disclosure statements reflecting annuity options. In addition, participants who purchase annuities will have more flexibility, including portability between plans.
8. Early withdrawal penalty: Certain types of plan distributions are exempt from the usual 10% tax penalty on early withdrawals prior to age 59½. The SECURE Act adds to the list by allowing penalty-free distributions for up to $5,000 of qualified birth and adoption expenses.
9. Fellowships and stipends: In the past, non-tuition fellowships and stipends received by graduate and postdoctoral students generally could not be used to fund IRA contributions. Now these amounts may be used for IRA funding.
10. 401(k) safe harbor rules: Finally, the new law includes various changes designed to enhance employee protections and encourage use of 401(k) plans. See a benefits specialist for more details.
Of course, this is only a brief overview. There is much more to this new law than first meets the eye. Stay tuned: In upcoming issues, we will feature ways to maximize the benefits of the SECURE Act and avoid major pitfalls.
Make This a “Tax Election” Year
Five key choices on 2019 returns
This a presidential election year, but there may be other important votes to cast in 2020: The elections you make on your 2019 tax return. Here are five choices that can make a big tax difference.
1. Joint or separate returns: If you are married, one of your first tax return decisions is whether to file jointly or as marrieds filing separately. Generally, a couple fares better with a joint return, but that is not always so. For example, one spouse might have a disproportionately large amount of deductible medical expenses. Due to the deduction floor of 7.5% of adjusted gross income (AGI) for 2019, the couple collectively may benefit by filing separately. Caution: This election has numerous other ramifications, so consider the overall impact.
2. Investment interest: The tax law allows you to deduct investment interest expenses up to the amount of net investment income for the year. Normally, “net investment income” for this purpose does not include capital gains. But you can elect to include long-term capital gains for which you forego the favorable tax rate. For 2019 returns, the maximum tax rate for long-term capital gains is 15% (20% for certain upper-income investors). With this election, you can “cherry-pick” the gains you want to treat as net investment income.
3. Installment sales: If you sell real estate or business interests in installments over two or more years, the tax liability is spread over the time in which payments are actually received. In effect, you postpone the tax from the sale, as well as possibly reducing the overall tax amount. This installment sale tax treatment is automatic. However, if it suits your needs, you can elect to pay the entire tax due in the year of the sale. This might be preferable on a 2019 return if it is otherwise a low tax year or you expect the next few years to be high tax years.
4. Home office deductions: Typically, a self-employed individual running a business from home qualifies for home office deductions. As a result, you are entitled to expenses directly attributable to the home office, plus a portion of the entire home’s expenses based on the percentage of business use of the home. However, instead of keeping detailed records, you may elect to use a simplified method equal to $5 per square foot of the home office, up to a maximum of $1,500. Note: The actual expense method often produces a bigger deduction and could be worth the extra work.
5. Standard mileage rate: When you use your vehicle for business driving, you can write off a portion of your actual expenses based on business use, plus a generous depreciation allowance. But this actual expense method requires detailed recordkeeping for every business trip and documentation of all expenses. Alternatively, you can use an IRS-approved deduction rate with less recordkeeping. For 2019, the flat rate is 58 cents per business mile (57.5 cents in 2020), plus related tolls and parking fees. However, you cannot use the standard mileage rate if you previously claimed accelerated depreciation for this vehicle.
Fortunately, you do not have to make these tough decisions on your own. Consult with an experienced tax professional early in tax filing season.
Don’t Take the Phishing Bait
Watch out for online scams
Are you getting pop-up messages on your computer or mysterious emails asking for your Social Security number (SSN) or other personal data? You may have been targeted by a "phishing" scam intended to steal information from unsuspecting victims.
The financial consequences can be devastating. What’s more, you may have to spend months or even years trying to clean up the mess.
Basic premise: The email or pop-up appears to be posted by an organization or individual you are familiar with, such as your bank, a friend in your email address book or even the government. It requests that you update, validate or confirm certain information. Some phishing emails threaten penalties or cancellations if you do not respond.
The message then directs you to a website that looks legitimate. This fake site is used to trick you into revealing personal information that con artists can use for their own purposes or to commit crimes in your name. Government authorities, including the IRS, have warned consumers about even more sophisticated attacks. Phishing is consistently one of the highest-ranked schemes on the list of the “Dirty Dozen” tax scams the IRS publicizes annually.
A little common sense can go far, but it is easy to be caught off-guard by a phishing scam. Consider these precautions.
- Do not reply to messages requesting personal or financial information. Similarly, do not click on any links in the message. A bona fide company would not ask for this type of information via email. If you have concerns, contact the organization using a telephone number you know to be genuine or initiate a new web browser session to go to the company’s actual website.
- Use anti-virus and anti-spyware software. Update these periodically. Some phishing emails contain software that can harm your computer or track online activity without your knowledge. Anti-virus software may protect you from inadvertently accepting unwanted files.
- Set up a computer "firewall." The firewall blocks outside communications from unauthorized sources. It is especially important to run a firewall if you have a broadband connection. Operating systems and browsers may also offer free software patches to close the "holes" in the system.
- Do not email personal or financial information like your SSN. If you initiate a transaction and want to provide information to the organization, look for indicators that the site is secure. Caveat: Such indicators are not 100% foolproof.
- Review credit card and bank account statements to check for unauthorized charges. If your statement is late by more than a couple of days, call your credit card company or bank to confirm your billing address and account balances.
- Be cautious about opening attachments or downloading files. These files may contain viruses or other software that can be harmful.
- Look at the actual email address instead of the display name. This may be a tip-off to imposters.
- Report phishing spam to the Federal Trade Commission (FTC) at www.ftc.gov/complaint as well as the company, bank or organization impersonated in the email. Most organizations provide details about how to report problems. Again, visit the legitimate website.
Finally, if you believe you are the victim of any identity theft scam, report it immediately to the FTC at www.consumer.gov/idtheft. Do not delay.
Finding Tax Cure for Medical Expenses
New law provides the prescription
Under the monumental 2017 tax law, the Tax Cuts and Jobs Act (TCJA), the threshold for deducting medical expenses was lowered from 10% of adjusted gross income (AGI) to 7.5% of AGI. But this tax break only applied to the 2017 and 2018 tax years.
Tax update: New “extender” legislation enacted late last year preserves the lower threshold, retroactive to 2019, and through 2020. This could provide itemizers with a unique opportunity to claim or boost their medical expense deduction on their 2019 returns.
For example, if you have an AGI of $100,000 for 2019 with $9,500 in unreimbursed medical expenses, you can now deduct $2,000. Previously, your deduction would have been zero.
Practical advice: Scour your records to find expenses that may help you qualify for a deduction for 2019 or increase your existing deduction. Here are some common examples of expenses you might have missed.
· Transportation costs: The deductible amount is not limited to the actual cost of the physician or hospital's services. You may also deduct the cost of getting back and forth from the treatment (even if similar treatment is available nearby). If you travel by car, you can either deduct your actual automobile expenses or a flat rate of 20 cents per mile in 2019 (decreasing to 17 cents in 2020). While the flat rate method is more convenient, you may come out ahead by keeping track of your actual expenses.
· Lodging costs: You can also deduct the cost of staying at a hotel or motel while you are receiving medical care away from home. However, the accommodations cannot be “lavish or extravagant.” The deductible amount for lodging is limited to $50 per day. If a companion's presence on the trip is required, the cost of the companion's lodging is also deductible (subject to the $50‑per‑day limit).
· Nursing care: If a family member needs nursing services in the home, the cost of such services is a deductible medical expense. The medical care does not have to be provided by a registered or trained nurse. In other words, you can pay someone else (e.g., another family member) to provide the care and deduct the expense.
· Capital improvements: You can deduct the cost of a home improvement if the improvement is made for a medical reason. For instance, the cost of installing central air conditioning to alleviate a child's asthma is deductible. The amount eligible for the deduction is the cost above the increase in value of your home. Side benefit: The cost of maintaining and operating the improvement also qualifies for the deduction.
Final words: Of course, medical expense deductions are only available if you itemize instead of claiming the standard deduction, which was increased by the TCJA. Review your personal situation with your professional tax advisor.
Big Change for the Kiddie Tax
The SECURE Act includes more than just retirement planning provisions.
Major news: In a significant change, the new law restores the previous method for calculating the “kiddie tax.” Prior to the Tax Cuts and Jobs Act (TCJA), the excess of a young child’s unearned income above an annual threshold was taxed at the top tax rate of the child’s parents. The TCJA based the tax on the tax rates in effect for estates and trusts.
Now the SECURE Act repeals the TCJA provision on the kiddie tax. In some cases, you might want to file an amended return. We will have more details in the next issue.
Facts and Figures
Timely points of particular interest
Coffee Breaks—Under federal law, short work breaks—like a coffee break in the morning—are compensable. Conversely, a lunch break can reduce the employee's total compensatory time for the day. This may affect overtime pay. But do not overlook state law. For instance, a company may be obligated to provide a lunch break, but not coffee breaks. Make sure you observe the applicable rules in your jurisdiction.
Standard Mileage Rates—The IRS recently announced standard mileage rates for 2020 The new rates are 57.5 cents per mile for business driving (down from 58 cents in 2019); 17 cents per mile for medical driving (down from 20 cents in 2019); and 14 cents per mile for driving for charitable purposes (the same as 2019). Related tolls and parking fees can be added to the total. Note: The charitable mileage rate is set statutorily.