New tax bills were signed into law by year-end could affect your tax your return

Posted January 2020

On December 20, 2019, President Trump signed into law two bills that would fund the government until September 2020. Inside the spending bills were many tax extenders, tax repeals, and changes that affect taxpayers.

The legislation repealed taxes associated with the Affordable Care Act. A 2.3% excise tax on medical devices was set to begin in 2020 and a 40% excise tax on the expensive health insurance plans known as “Cadillac Plans” was set to begin in 2022. Both of these taxes were repealed. In addition, the annual fee to be imposed on health insurance providers was also repealed.

The bill also included the SECURE Act (Setting Every Community Up for Retirement Enhancement). This act makes significant changes to retirement funding. The age for the required minimum distribution has changed from age 70 ½ to age 72. The act changes requirements for multiple-employer plans to make it simpler for smaller companies to combine plans together with completely unrelated employers. Distributions from qualified plans and IRAs for births and adoptions are now penalty free. Beneficiaries of inherited plans and IRAs must withdraw all money within 10 years.

Previously, an employee had to be at least age 21 and work at least 1,000 hours in a 12 month period to make eligible deferrals. Beginning December 31, 2020, the new law allows employees at least age 21 who have worked at least 500 hours per year for 3 consecutive years to begin making eligible deferrals to their 401(k plan). There are many other rules that apply to 401(k) eligibility, but the law revises the number of service hours for part-time employees.

Some of the extenders that were included in the legislation include the following:

  • Indian depreciation has been retroactively enacted for 2018 and extended through 2020. Accelerated depreciation is available for property owned within an Indian Reservation.
  • The Indian Employment credit has also been retroactively enacted for 2018 and extended to tax years beginning before January 1, 2021. The credit is equal to 20% of the first $20,000 of wages paid and health insurance costs incurred during the year, in excess of the amount of such wages and cost incurred by the employer in 1993, for eligible employees. Eligible employees are employees are an enrolled member or the spouse of an enrolled member of an Indian Tribe who performs services for the employer within an Indian Reservation.
  • The Work Opportunity Tax Credit (WOTC) is extended through 2020. Employers will receive a credit for hiring individuals in one or more target segments.
  • The employer tax credit for paid family and medical leave is extended through 2020. Eligible employers may claim a general business credit for wages paid to qualified employees for medical and family leave. The credit is 12.5% of eligible wages as long as the wages paid during leave are at least 50% of the prior wages.  The credit may increase by 0.25% for each percentage point paid above 50% of prior wages. The maximum leave allowed for the credit is 12 weeks per year.
  • Taxpayers whose income is below certain thresholds may deduct mortgage insurance premiums as mortgage interest expense if the insurance is purchased in conjunction with the indebtedness on the principal residence. This has been extended through 2020.
  • Qualified principal residence indebtedness, i.e. the mortgage on the main residence, if canceled, can be excluded from taxable income through 2020.
  • Medical expense itemized deduction of 7.5% of adjusted gross income instead of 10% is in effect for 2019 and 2020.
  • Qualified tuition and related expenses are still an above-the-line deduction through 2020.
  • The federal excise tax on beer and spirits will continue to be reduced until after 2020.
  • A 60-day filing extension becomes automatic for federally declared disaster areas.
  • Non-profit organizations and churches that provide parking to their employees are no longer subject to the 21% unrelated business income tax. The law is retroactive for tax years 2018 and 2019.
  • Empowerment zone incentives are retroactively extended for 2019 through 2020.
  • Several credits for energy production have been extended and/or reinstated. These include solar and wind power credits, qualified fuel cell vehicles, alternative fuel vehicles, and energy efficient buildings.
  • Taxpayers who enhance their principal residences with energy efficient windows, doors, skylights, and roofs can take a nonbusiness energy credit of 10% of the amounts incurred for those improvements through 2020. Credits are available for energy efficient appliances such as furnaces, heaters, heat pumps, biomass stoves, boilers, central heat and air units, and circulating fans in amounts ranging from $50 to $300 with a $500 lifetime cap.

Please contact us if you would like to discuss whether your business is eligible for any of these credit opportunities.