The New Rules in The SECURE Act that May Affect You
Passed by Congress last spring, The SECURE Act (an acronym for the “Setting Every Community Up for Retirement Enhancement”) was finally signed into law as part of the massive spending bill approved at year end. The entire bill is nearly 1,200 pages long, but the Act regarding to changes in rules for your retirement savings is examined below.
- Change to Required Minimum Distribution (RMD) age
The new law raises the age at which individuals must begin taking RMDs from their retirement accounts from 70½ to 72.
Please Note: The new law only applies to people who turned 70½ after December 31, 2019. If an individual turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020, and beyond.
- Contributions to traditional IRAs after age 70½
The updated law now allows for contributions to an individual retirement account (IRA) after 70½. Individuals may continue contributing to an IRA at any age, with the caveat that they have earned income in the year of the contribution.
- Rules for inherited retirement accounts (“Stretch IRAs”) Previously, inherited retirement accounts were able to distribute those assets over the beneficiary’s lifetime. Under the new rules, those assets must be distributed within 10 years. This has potentially significant implications for estate planning. Exceptions are in place for spouses, minor children, disabled individuals and people less than 10 years younger than the decedent. The bill only applies to accounts that are inherited in 2020 and beyond, and does not affect existing inherited accounts.
- Withdrawals for birth/adoption expenses penalty-free
Through the first year after the birth or adoptionNew parents can withdraw up to $5,000 from an IRA or an employer-sponsored retirement plan to pay for birth and/or adoption expenses, . Taxes still need to be paid on pre-tax contributions, but no penalties apply to the withdrawal.
- Participation in a 401(k) plan for part-time workers
This new rule allows for part-time employees to participate in a company’s 401(K) plan. They become eligible once they have worked for the company at least 500 hours a year for three consecutive years .
- Retirement plan projected income disclosure
The law requires the Department of Labor to propose rules for a new disclosure to retirement plan participants that will show the participant’s projected monthly income in retirement based on current retirement assets. It’s designed as a kind a “progress report” to show employees how they are doing on saving. The rule-making process for this is likely to take more than a year, followed by an implementation period, so it is unlikely we will see this standard in place in 2020 before this becomes standard.
- Easier access for annuities to be offered in 401(k) plans
Though plans are not required to do so, the new law lowers restrictions on offering annuities in employer-sponsored plans.
- 529 plan rule changes can help repay student loans
The law allows for more flexibility when in comes to assets in these college-savings plans, now allowing for them to be used to repay up to $10,000 in qualifying student loans.
- Provisions to help small businesses
Several provisions in the bill are designed to make it easier for small businesses to offer retirement plans to their employees, including one that will allow unrelated small businesses to group themselves in “multiple employers plans” to offer a plan to employees.
Statistics show that most individuals don’t—or can’t—save enough for retirement early on to live comfortable in their golden years. And it’s hard to say if these changes will help the average taxpayer reach their retirement goals with a greater degree of ease. But it’s a start.
A number of significant tax provisions—many already expired—have been extended or reinstated through the end of Tax Year 2019. This is good news for millions of taxpayers, but as always, there are restrictions, caps, and qualifying factors that determine eligibility. Below we have culled the points in the newly passed law that are the most likely to be of interest to our clients.
Mortgages, Education, and Medical Expenses
Mortgage Debt Exclusion
Though it’s hard to imagine any upside to a personal financial crisis resulting in a foreclosure, short sale, or loan modification on your home, under the Tax Extender you may still be allowed to exclude the amount of debt forgiven on your principal residence this year, up to $2,000,000.
Mortgage Insurance Premiums Deduction
If you were required to purchase mortgage insurance as a requirement of your home loan, you may be able to deduct the amount you paid for the insurance, since it is considered “interest” for mortgage interest deduction purposes.
To claim the deduction, though, joint taxpayers must have an adjusted gross income (AGI) under $100,000 ($50,000 if married filing separately).
Tuition and Fees Deduction
With the extension of the Tuition and Fees Deduction you may be able to take advantage of another education tax benefit option if you, your spouse, or your dependent child have college expenses. The is for qualified expenses for higher education like tuition, books, and other supplies, even if you took only one class.
The deduction is capped at $4,000 for individuals with AGI up to $65,000 ($130,000 for joint filers) and $2,000 for individuals with AGI over $65,001 but below to $80,000 (and $130,001 to $160,000 for joint filers).
Medical Expense Deduction
We all know that medical expenses can be a substantial drain on a family’s finances. The medical expense deduction threshold was scheduled to go back up to 10% in 2019, but the new provision extends the current 7.5% threshold established in 2017. As a result, you may be able to claim your unreimbursed medical expenses provided that they are more than 7.5% of your AGI and you can claim itemized tax deductions.
If your AGI is $50,000, you can claim your medical expenses that are more than $3,750 ($50,000 x 7.5%) if you can claim itemized deductions.
At the 10% threshold they would need to be more than $5,000.
Energy Efficiency Incentives
Nonbusiness Energy Property Credit
If you made energy efficient improvements to your home like energy-saving roofs, windows, skylights, and doors, you’ll still be able to claim the Nonbusiness Energy Property credit for 10% of amounts paid for qualified energy efficiency improvements up to a lifetime cap of $500 or in fixed dollar amounts ranging from $50 to $300 for energy efficient property, including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans.
New qualified fuel cell motor vehicles
If you purchased a new qualified fuel cell vehicle in 2019, you may be eligible to receive a credit between $4,000 and $40,000,
Special Tax Relief Rules for Disaster Victims
Special tax relief is available under the Tax Extender law for individuals and businesses in Presidentially-declared disaster areas occurring between January 1, 2018 and 30 days following the date of enactment of the law. Provisions of the law specific to disaster victims are listed below.
Qualified disaster-related personal casualty losses
If you were a disaster victim, the provision eliminates the current law requirement that personal losses have to exceed 10% of adjusted gross income and eliminates the requirement that you have to itemize your tax deductions in order to claim your casualty loss.
Early access to retirement funds
For hurricane victims, the 10% early plan withdrawal penalty will be waived for qualified disaster relief distributions from retirement funds up to $100,000. If you had to cancel your home purchase as a result of an eligible disaster, you can also re-contribute your retirement plan withdrawal for home purchases or construction and avoid the tax on the plan withdrawal.
Determining Earned Income Tax Credit and Child Tax Credit
If you were in a designated disaster area in 2019, you can use your income from 2018, if it’s lower, to qualify for the Earned Income Tax Credit and the Child Tax Credit.
Automatic extension filing deadline
You will be automatically granted a 60-day tax filing extension if your principal place of residence or business is located in a disaster area.
It’s easy to forget that what happens in your working and personal life can affect your tax returns in any given year. Before tax season deadlines sneak up on you, now is a good time to take a moment and consider what changes may have occurred in the past year that will affect your tax return.
- Has your address or phone number changed since the prior year?
Please provide your current information so we can be sure your return is filed accurately.
- Did you welcome a new child in 2019?
If the answer is yes: First, congratulations! We’ll need to update your organizer with their full name, date of birth, and SSN.
- Did you collect unemployment for all or part of the year?
If so, we’ll need your 1099-G form. Like all official tax document, these are required to be sent to you before the end of January.
- Is your health insurance through the Mass Health Connector?
You’ll to wait for your form 1095A from the state before filing. These forms are sent out by the state before the end of January. Remember: We cannot process your return without this form!
- Did you pay any rent last year?
Please let us know how much you paid, as well as the name of your landlord.
- Do you believe your medical expenses may be deductible?
Most taxpayers do not have enough qualifying medical deductions to itemize under current rules, but if you think you do, please provide us with ONLY THE TOTALS of these expenses. DO NOT bring or send us your medical and dental receipts. This will both maintain the privacy of your medical information, and allow us to process your return more quickly. See our more detailed posts about medical deductions here and here.
- Are you paid by direct deposit?
Even if you are not, we recommend making a habit of checking your pay stubs every month to verify the withholdings are per your instructions. Since most employees are paid via direct deposit, and paystubs usually issued by email, most go unchecked. This can result in errors being discovered in the following year when it is too late to make any corrections. See our additional post about this here.
You can probably think of additional happenings in your life that might make a difference on your Federal or State returns. Give us a call soon if you have further questions we can help answer for you.
One item to be aware of as we move into the new decade is the importance of checking your paystubs on a regular basis to ensure accuracy, particularly with regard to your withholding. A recent study has shown that most people receive their payroll check through direct deposit and their paystubs are usually issued by e-mail. As a result of this, most paystubs go unchecked, and unfortunately errors may be discovered in the following year—when it is too late to make any corrections.
To avoid this, we recommend making a habit of checking your pay stubs every month to verify the withholdings are per your instructions—even if you are not not paid via direct deposit.
See our earlier post about the IRS’s online withholding calculator here.
With the astronomical costs for prescription drugs, it’s not unusual for us to hear from clients that the believe they should itemize their taxes based on their medical expenses. The truth is, even for a couple with multiple prescriptions from more than one pharmacy, most taxpayers do not have enough qualifying medical deductions to itemize under current rules.
The current threshold for standardized deductions is what helps us decide whether it makes sense for you to itemize. The best and fastest way to determine this is to have the total amounts of your categorized expenses.
There are cases, of course, where itemization may be warranted—for instance if you have experienced a catastrophic event where your out-of-pocket costs represent a significant portion of your income. Either way, We DO NOT need to see your receipts! Nor should we. ONLY THE TOTALS of these expenses are required, and in the interest of both protecting privacy of your medical information, and processing your return more quickly, we ask that you do not bring or send us your receipts. If the deduction for medical expenses is ever questioned, we would need to see the receipts at that time, but that would be the rare exception.
Allowable deductions for Iindividual Retirement Account (IRA) contributions are based on these three factors:
- Whether or not you are covered by a retirement plan at work
- Your filing status
- Your adjusted gross income (AGI)
If you are considering making an IRA contribution for 2019, we suggest that you consult the tables provided by the IRS at the links below to see how your AGI will affect whether you can deduct all, some, or none of your IRA contribution(s).
IRS rules for IRAs: If You Are Covered at Work or If You Are Not Covered at Work
The percentage for deducting medical expenses on Schedule A increases to 10% of adjusted gross income this year, versus the 7.5% allowed for 2018. Historically, most taxpayers don’t meet this threshhold—and we anticipate even fewer with the larger percentage requirement—but it is still worth investigating, particularly if you or your family members have undergone any significant medical procedures in the past 12 months.
To figure out if you have enough medical expenses to claim a deduction, the formula is to multiply your Adjusted Gross Income by 10%. For example:If your Adjusted Gross Income is $100,000.00, any out-of-pocket medical expenses above $10,000.00 can be added to Schedule A as a deduction.
If it is available, the best way to deduct your medical expenses is still to take advantage of a Flexible Spending Account through your employer.
Please note that we do not need to see copies of your medical and dental receipts! The total amount of all of your medical expenses is all we need to include on Schedule A if you are itemizing. If the deduction for medical expenses is ever questioned, we will need the receipts at that time, but otherwise, you should maintain the privacy of your medical information just as you would with any service provider.
The standard deductions for 2019 returns are as follows:
$24,400.00 if you are Married and filing a joint return;
$18,350.00 if you are filing as Head of Household; and
$12,200.00 if you are a Single filer.
You’ll notice they haven’t gone up much, but every little bit helps!