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Year-End Tax Bill Creates Opportunity

Spending Bill and Year-End Tax Planning

February 12, 2020

The spending bill passed last month brings with it some big changes for Iowan’s retirement tax planning. It also revived some tax breaks that are important to Greater Des Moines (DSM) business — some of which will make it possible for certain taxpayers to file amended returns for 2018 to claim tax refunds.

Retirement Changes

Lawmakers, focused on retirement provisions to be in the next round of tax reform, have done so through the “Setting Every Community Up for Retirement Enhancement Act of 2019”, or more commonly referred to as the SECURE Act. Some of the significant provisions of the SECURE Act include:

  •  An increase to the Required Minimum Distribution (RMD) age from 70 ½ to 72
  • Allow penalty-free withdrawals from retirement plans for new parents
  • Allow part-time workers to participate in 401(k) plans
  • Eliminate the age limitation on traditional IRA contributions

Once you reach a certain age, a distribution is required to be made from your retirement account. The amount of this RMD is calculated based on your life-expectancy and account balances at the end of the prior year. Extending the beginning mandatory withdrawal age from 70 ½ to 72 helps taxpayers not only understand when their requirement begins but also allows retirement funds to continue to grow tax deferred a little longer. Taxpayers turning 70 ½ after 2019 will be allowed to wait until their 72nd birthday to begin mandatory withdrawals.

A pay-for of the SECURE Act was the change in timing of required distributions of inherited IRAs. Withdrawals from IRAs inherited from owners who died before 2020 can be taken over a beneficiary’s lifetime, allowing for significant tax-deferred or tax-free growth. But the SECURE Act reduces that distribution timeline and now requires IRAs inherited after 2020 to distribute their balances over a maximum of 10 years. However, surviving spouses are not subject to the revised distribution requirement.

Credits and Deductions Revived

Several expired or expiring tax credits and deductions that either were not previously available after 2017 or were set to expire this year were extended, including:

  • Credit for biodiesel and renewable diesel used as fuel now available for 2018-2022 (Iowa renewable fuel producers pushed hard for this provision.
  • Itemized deduction of mortgage insurance premiums paid now available for 2018-2020
  • Lower adjusted gross income threshold for itemized medical deductions from 10% to 7.5% for 2019 and 2020 for all taxpayers
  • Deduction of qualified tuition and related expenses now available for 2018-2020
  • Credit for nonbusiness energy property now available for 2018-2020
  • Credit for alternative fuel vehicles now available for 2018-2020
  • Credit for energy efficient homes now available for 2018-2020
  • Deduction for energy efficient commercial buildings now available for 2018-2020
  • Credit for paid FMLA extended to 2020
  • Work opportunity credit now extended to 2020
  • Reduced excise tax on beer extended to 2020

With many of these changes being retroactive, it’s possible a refund of prior year taxes could be available!  For example, if a large energy efficient commercial building project was completed during 2018, the associated accelerated deduction could bring current cash flow and tax savings.  Review the full list of revived credits and deductions with your tax adviser to see if these changes warrant an amended prior year tax return.

Favorable Repeal for Tax Exempt Organizations

The Tax Cuts and Jobs Act of 2017 created a provision that disallowed an expense for company paid employee parking considered a fringe benefit. A version of this applied to nonprofits, making them subject to tax on these benefits. This provision has been repealed for nonprofit organizations retroactively to its enactment date.

ACA Taxes Repealed

The Act also repeals three healthcare related provision stemming from The Affordable Care Act, or ACA. The “Cadillac Tax” which imposes an excise tax on the value of coverage over certain thresholds has been delayed since its enactment and will ultimately never make it into effect now that it has been repealed. The controversial health insurer tax, or “HIT”, had been suspended for 2019, but slated to cost the health insurance industry $15.5 billion for 2020 has also been repealed, along with the medical device excise tax that puts a 2.3% excise tax on the value of medical devices sold domestically. 

Kiddie Tax

Tax rules which tax a child’s unearned income are commonly referred to as “Kiddie Tax”.  Before 2018, a child’s unearned income was taxed at the rate of the child’s parents, however, the Tax Cuts and Jobs Act tied those tax rates to the trust and estate tables, which reach higher rates much more quickly. The SECURE act repeals those rules, reverting back to those which were in effect before 2018, starting with 2020 filings. Taxpayers have the option to use the pre-2018 rules on 2019 and amended 2018 returns.

The Greater Des Moines Partnership is the economic and community development organization for more than 6,400 Regional Business Members and 340+ Investors. The Partnership is a champion of the DSM USA message of Greater Des Moines (DSM) as a welcoming, diverse and vibrant community. Learn more about The Partnership’s vision of one voice, one mission as one region.