On December 20, 2019, President Trump signed the new budget bill, called the Further Consolidated Appropriations Act, into law. The act has received little attention in the media due to politics and world events, so we created this article to summarize a few changes that may impact you personally.
Many provisions of the act impact 2020 and beyond while others retroactively change existing law, creating a tax-saving opportunity to amend filed returns.
We are awaiting further guidance from the IRS on many details involving these changes, so we can only cover broad-stroke changes at this time. Here they are:
- Starting in 2020, anyone of any age may now deposit money to an IRA if they have earned income, such as a wage or self-employment. Some nuances may apply, but the old rule prohibiting deposits during or after the year turning 70½ no longer does. Note: At the time of this writing, how this provision may impact required Minimum Distributions remains unclear.
- In 2020, the mandatory age taxpayers must take distributions from their IRAs increases to 72. The previous law was confusing and complicated. It required distributions to start by April 1st of the year after the year the taxpayer turned 70½.
- IRAs inherited from people (other than your spouse and a few other exceptions) who passed away after 2019 must be distributed within ten years of the owner’s death (opposed to 5 years previously). Unfortunately, change does not affect IRAs inherited from someone who died before 2020 – the five-year rule still applies.
- Stipends and fellowships now qualify as earnings that allow the recipient to make IRA contributions.
- Parents can now withdraw up to $5,000 from a retirement plan penalty-free for the birth or legal adoption of a child. The withdraw can occur up to one year after birth or adoption. The amount withdrawn is still taxable for income tax purposes but can be redeposited without penalty. If the withdrawn funds get deposited back to the IRS within 60 days of withdrawal, it is not taxable.
College and Children Changes
- You may now withdraw up to $10,000 in total during your lifetime from a 529 plan to repay student loans of the account beneficiary (or their siblings), without tax or penalty, as a qualified educational expense.
- In 2020, qualified apprenticeship programs will qualify for 529 Plan withdrawals.
- Once again, children with large amounts of interest, dividends, or capital gain income get taxed at their parent’s rates instead of the potentially higher trust tax rates.
- The Tuition and Fees Deduction for qualified education is RETROACTIVELY restored for 2018-2020.
- Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness: This provision initially expired on 12/31/2017 and has been extended retroactively for 2018 through 2020. This income exclusion allows homeowners to exclude canceled debt income related to losing or short-selling their primary residence. For more information, please read our article on how this change may create a significant refund opportunity for many taxpayers.
- The Mortgage Insurance Premiums deduction is retroactively restored for 2018 through 2020. If you paid mortgage interest in 2018 and itemized, you might be entitled to a refund.
- The AGI restriction for claiming Medical Expenses as an itemized deduction is now 7.5% (not 10%) for 2019 and 2020.
- The credit for installing an electric car charger is retroactively available for 2018-2020.
So, there’s a summary of the more significant changes that impact individual returns for 2018, 2019 and 2020.