January Tax Tips


This month we cover the following hot topics. Enjoy!

  • Congress Reinstates Expired Tax Provisions

  • Eight Changes in the SECURE Act You Need to Know

  • Kiddie Tax Changes

  • Solo 401(k) Could Be Your Best Retirement Plan Option

Congress Reinstates Expired Tax Provisions

Congress let many tax provisions expire on December 31, 2017, making them dead for your already-filed 2018 tax returns.

In what has become a much too common practice, Congress resurrected the dead provisions retroactively to January 1, 2018. That’s good news. The bad news is that if you have any of these deductions, we have to amend your tax returns to make this work for you.

And you can relax when filing your 2019 and 2020 tax returns because lawmakers extended the “extender” tax laws for both years. Thus, no worries until 2021—and even longer for a few extenders that received special treatment.

Back from the Dead

The big five tax breaks that most likely impact your Form 1040 are as follows:

1. Exclusion from income for cancellation of acquisition debt on your principal residence (up to $2 million)

2. Deduction for mortgage insurance premiums as residence interest

3. 7.5 percent floor to deduct medical expenses (instead of 10 percent)

4. Above-the-line tuition and fees deduction

5. Non-business energy property credit for energy-efficient improvements to your residence

Congress extended these five tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020, so you’re good for both 2019 and 2020.

Other Provisions Revived

Congress also extended the following tax breaks retroactively to January 1, 2018, and they now expire on December 31, 2020 (unless otherwise noted):

· Black lung disability trust fund tax

· Indian employment credit

· Railroad track maintenance credit (December 31, 2022)

· Mine rescue team training credit

· Certain racehorses as three-year depreciable property

· Seven-year recovery period for motorsports entertainment complexes

· Accelerated depreciation for business property on Indian reservations

· Expensing rules for certain film, television, and theater productions

· Empowerment zone tax incentives

· American Samoa economic development credit

· Biodiesel and renewable diesel credit (December 31, 2022)

· Second-generation biofuel producer credit

· Qualified fuel-cell motor vehicles

· Alternative fuel-refueling property credit

· Two-wheeled plug-in electric vehicle credit (December 31, 2021)

· Credit for electricity produced from specific renewable resources

· Production credit for Indian coal facilities

· Energy-efficient homes credit

· Special depreciation allowance for second-generation biofuel plant property

· Energy-efficient commercial buildings deduction

Temporary Provisions Extended

Congress originally scheduled these provisions to end in 2019 and has now extended them through 2020:

· New markets tax credit

· Paid family and medical leave credit

· Work opportunity credit

· Beer, wine, and distilled spirits reductions in certain excise taxes

· Look-through rule for certain controlled foreign corporations

· Health insurance coverage credit

Eight Changes in the SECURE Act You Need to Know

As has become usual practice, Congress passed some meaningful tax legislation as it recessed for the holidays. In one of the new meaningful laws, enacted on December 20, you will find the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).

The SECURE Act made many changes to how you save money for your retirement, how you use your money in retirement, and how you can better use your Section 529 plans. Whether you are age 35 or age 75, these changes affect you.

Here are eight of the changes.

1. Small-Employer Automatic Contribution Tax Credit

If your business has a 401(k) plan or a SIMPLE (Savings Incentive Match Plan for Employees) plan that covers 100 or fewer employees and it implements an automatic contribution arrangement for employees, either you or it qualifies for a $500 tax credit each year for three years, beginning with the first year of such automatic contribution.

This change is effective for tax years beginning after December 31, 2019.

Tax tip. This credit can apply to both newly created and existing retirement plans.

2. IRA Contributions for Graduate and Postdoctoral Students

Before the SECURE Act, certain taxable stipends and non-tuition fellowship payments received by graduate and postdoctoral students were included in taxable income but not treated as compensation for IRA purposes. Thus, the monies received did not count as compensation that would enable IRA contributions.

The SECURE Act removed the “compensation” obstacle. The new law states: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

The change enables these students to begin saving for retirement and accumulating tax-favored retirement savings, if they have any funds available (remember, these are students). This change applies to tax years beginning after December 31, 2019.

Tax tip. If your child pays no income tax or pays tax at the 10 or 12 percent rate, consider contributing to a Roth IRA instead of a traditional IRA.

3. No Age Limit on Traditional IRA Contributions

Prior law stopped you from contributing funds to a traditional IRA if you were age 70 1/2 or older. Now you can make a traditional IRA contribution at any age, just as you could and still can with a Roth IRA.

This change applies to contributions made for tax years beginning after December 31, 2019.

4. No 10 Percent Penalty for Birth/Adoption Withdrawals

You pay no 10 percent early withdrawal penalty on IRA or qualified retirement plan distributions if the distribution is a “qualified birth or adoption distribution.” The maximum penalty-free distribution is $5,000 per individual per birth or adoption. For this purpose, a qualified plan does not include a defined benefit plan.

This change applies to distributions made after December 31, 2019.

Tax tip. A birth or adoption in 2019 can signal the start of the one year, allowing qualified birth and adoption distributions as soon as January 1, 2020.

5. RMDs Start at Age 72

Before the SECURE Act, you generally had to start taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan in the tax year you turned age 70 1/2. Now you can wait until the tax year you turn age 72.

This change applies to RMDs after December 31, 2019, if you turn age 70 1/2 after December 31, 2019.

6. Open a Retirement Plan Later

Under the SECURE Act, if you adopt a stock bonus, pension, profit-sharing, or annuity plan after the close of a tax year but before your tax return due date plus extensions, you can elect to treat the plan as if you adopted it on the last day of the tax year.

Under prior law, you had to establish the plan before the end of the tax year to make contributions for that tax year. This change applies to plans adopted for tax years beginning after December 31, 2019.

How it works. You can establish and fund, for example, an individual 401(k) for a Schedule C business as late as October 15, 2021, and have the 401(k) in place for 2020.

7. Expanded Tax-Free Section 529 Plan Distributions