The SECURE ACT - New Rules for Retirees - Smith Conley & Associates, PC

New Law Extends Key Tax Breaks into 2020 — aka How Congress tries to upset your year-end planning

Just when it seemed like Congress was too distracted by impeachment proceedings and national security to worry about taxes, they throw curveballs into our year-end tax planning. The Extenders and Secure (Retirement) Act are just a couple of the several such legislative items passed recently.

Before we talk about “Extenders,” let’s explain what they are. For well over a decade, Congress has inserted targeted tax breaks that will expire in the next year. These are typically renewed each year or so to keep them out of the long-term national debt projections. They also allow Congress to reward certain industries without being accused of vastly increasing the deficit.

The good news is that most of these expired (and now restored items) will equate to tax reductions for most clients.

If you’d like to explore them in more detail, click the plus sign below.

What they slipped into the Extenders Bill

Mortgage debt forgiveness: Under a unique tax law provision, a discharge of qualified mortgage debt may be excluded from federal income tax, up to a limit of $2 million. The tax exclusion is only available for debt on a principal residence. Status: Expired but renewed and extended for 2020.

Mortgage insurance premiums: This provision allows taxpayers to deduct mortgage insurance premiums, subject to a phase-out beginning at $100,000 of adjusted gross income (AGI). The deduction is available for payments for a principal residence and one other home, like a vacation home. Status: Expired but renewed and extended for 2020

Medical deduction: The recent massive tax legislation, the Tax Cuts and Jobs Act (TCJA), reduced the threshold for deducting medical expenses from 10% of AGI to 7.5%, but only for 2017 and 2018. Status: Expired but renewed and extended for 2020.

Tuition-and-fees deduction: The tuition-and-fees deduction, which may be claimed above-the-line in lieu of a higher education credit, is subject to a phase-out based on modified adjusted gross income (MAGI). The credit could be either $4,000 or $2,000, depending on MAGI, until the phase-out is complete. Status: Expired but renewed and extended for 2020.

Family and medical leave credit: The TCJA authorized a tax credit for employers providing paid family and medical leave to employees. This credit, which initially was created to last only through 2019, is based on wages paid for a maximum leave of 12 weeks. It ranges from 12.5% to 25% of the paid wages. Status: Expired but renewed and extended for 2020.

Empowerment zones: Businesses and individual residents within designated empowerment zones are eligible for special tax incentives such as a 20% wage credit, liberalized Section 179 expensing, tax-exempt bond financing and deferral of capital gains tax on the sale of qualified assets sold and replaced and (depending on what you drive to work) –
Plug-in vehicles: The new law provides a 10% credit, capped at $2,500, for highway-capable, two-wheeled plug-in electric vehicles. To qualify, battery capacity within the vehicles must be greater than or equal to 2.5 kilowatt-hours.
Status: Expired since 2017 but renewed and extended for 2020.

Nonbusiness energy property:

The Code provides a credit for purchases of nonbusiness energy property. The Code allows a credit of 10% of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences. The Code allows credits of 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, and is subject to a lifetime cap of $500.
[Editor’s Note] If you like large tax credits for saving energy check out our post on a 30% solar credit!

Status: Expired but renewed and extended for 2020.

Although the Secure Act was sold as a “make your retirement better act,” the biggest beneficiaries will likely be the companies that sell Annuities. Notwithstanding that, some of its provisions may help you save money. Next week, we’ll cover some ways that you can counter some of the adverse effects of the bill.
Click the plus sign below to see our detailed summary of the major areas.

What they slipped into the So-called SECURE Bill

Increase in Age for Required Beginning Date for Mandatory Distributions
Employer-provided qualified retirement plans such as 401(k), 403(b), traditional IRAs, and individual retirement annuities are subject to required minimum distribution rules.,

Under pre-Act law, the required beginning distribution (aka RBD) for IRAs is April 1 following the calendar year in which the IRA owner attains age 70-1/2. For employer-sponsored retirement plans (if you don’t own 5% or more of the company) the RBD is April 1 following the later of the calendar year in which the employee attains age 70-1/2 or retires. For an employee who is a 5% owner, the RBD is the same as for IRAs even if the employee continues to work past age 70-1/2.

A number of payout choices are available where an IRA or retirement plan account owner dies before the RBD and the spouse is the account’s beneficiary. Under pre-Act law, one of these choices allows the spouse to delay distributions from the decedent’s account until Dec. 31 of the year in which the decedent would have attained age 70-1/2.

New law. Under the SECURE Act, the RBD for IRAs is April 1 following the calendar year in which the IRA owner attains age 72.

Spouses have always been allowed a special treatment when they are the beneficiary of the IRA. When an IRA or retirement plan account owner dies before the required distribution date and the spouse is the account’s beneficiary, the spouse will be able to delay distributions from the decedent’s account until Dec. 31 of the year in which the decedent would have attained age 72.

Effective date: The above required-beginning-date changes are effective for distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70-1/2 after that date.

Repeal of the maximum age for traditional IRA contributions.
This is a one of the more useful provisions. Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Post-Death Required Minimum Distribution Rules Modified – Stretch IRAs eliminated
Minimum distribution rules apply to tax-favored employer-sponsored retirement plans and IRAs.

While an employee (or IRA owner) is alive, distributions of the individual’s interest are required to be over the life or life expectancy of the employee (or IRA owner), or over the joint lives or joint life expectancy of the employee (or IRA owner) and a designated beneficiary.

Under pre-Act law, the after-death minimum distributions rules vary depending on (a) whether an employee (or IRA owner) dies before, on, or after the required beginning date, and (b) whether there is a designated beneficiary for the benefit. Under the regs, a designated beneficiary generally must be an individual. If an employee (or IRA owner) dies on or after the required beginning date, the basic statutory rule is that the remaining interest must be distributed at least as rapidly as under the method of distribution being used before death.

If an employee (or IRA owner) dies before the required beginning date and any portion of the benefit is payable to a designated beneficiary, the statutory rule is that distributions are generally required to begin within one year of the employee’s (or IRA owner’s) death (or such later date as prescribed in regs) and are allowed to be paid over the life or life expectancy of the designated beneficiary.

If the beneficiary of the employee (or IRA owner) is the individual’s surviving spouse, distributions are not required to begin until the year in which the employee (or IRA owner) would have attained age 70½. If the surviving spouse dies before the employee (or IRA owner) would have attained age 70½, the after-death rules apply after the death of the spouse as though the spouse were the employee (or IRA owner).If an employee (or IRA owner) dies before the required beginning date and there is no designated beneficiary, then the entire remaining interest of the employee (or IRA owner) must generally be distributed by the end of the fifth calendar year following the individual’s death (the 5-year rule).

New law. Generally effective for distributions with respect to employees (or IRA owners) who die after Dec. 31, 2019 (see below for exceptions), the SECURE Act modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances (including annuity contracts purchased from insurance companies under defined contribution plans or IRAs) upon the death of the account owner.

Under the SECURE Act, the general rule is that after an employee (or IRA owner) dies, the remaining account balance must be distributed to designated beneficiaries within 10 years after the date of death. This rule applies regardless of whether the IRA owner dies before, on, or after the required beginning date, unless the designated beneficiary is an eligible designated beneficiary as explained below.

As always, there is a boatload of exceptions to the rule. Exceptions to the 10-year rule apply to any eligible designated beneficiary. This is an individual who, with respect to the employee or IRA owner, on the date of his or her death, is:

(1) the surviving spouse of the employee or IRA owner;

(2) a child of the employee or IRA owner who has not reached majority;

(3) a chronically-ill individual, and

(4) any other individual who is not more than ten years younger than the employee or IRA owner.

Effective date. The above changes generally apply to distributions with respect to employees or IRA owners who die after Dec. 31, 2019.

Where does all this leave us? Well if you have, have had, or plan to have an IRA (or any tax-deferred retirement plan) – you should call us.
Remember that we're just a click away if you need help.

Author
Recent Posts

David Conley

David is a partner at Smith, Conley & Associates, PC. In addition to writing and tax consulting, he is active in the pro-life community serving as President of the Fayette County Right to Life chapter of Georgia Right to Life.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.