Tax Law Changes That Could Impact Your Finances in 2020

Tax Law Changes That Could Impact Your Finances in 2020

By Derek Northup, CPA, Chief Financial Officer/Tax Director

At the end of 2019, a couple of pieces of legislation were signed into law that will potentially affect the taxes of a large number of Americans. The Setting Every Community Up For Retirement Enhancement Act (SECURE Act)¹ made major changes to IRAs and 401(k) plans, while the Further Consolidated Appropriations Act² revived several of the so-called tax extenders that expired in 2018.

In this piece, we will look at the tax implications of both Acts and how they could impact your finances.

SECURE Act
The SECURE Act made changes in two broad categories, 401(k) plans and IRAs. The changes related to 401(k) plans mostly center around eligibility, small employer plans and administrative changes for employers. One significant change was that taxpayers can now withdraw up to $5,000 from their 401(k) plan without penalty upon the birth or adoption of a child. There were also changes to 529 plans. 529 funds can now be used for the cost of apprenticeships or to cover homeschooling costs. Additionally, 529 funds can be used to pay up to $10,000 of qualified student loan repayments.

The biggest changes in the SECURE Act centered around IRAs. Highlights include:

• Required minimum distribution (RMD) age moves from 70 ½ to 72. However, if you have already begun taking RMDs you must continue to take them. This change affects those who had not yet reached age 70 ½ in 2019.
• Qualified Charitable Distributions (QCDs) can still be made starting at age 70 ½. Previously, RMDs and QCDs were tied together, but this legislation did not move the eligibility age of QCDs to 72.
• As long as you are working, you can still contribute to an IRA beyond age 70 ½.

Now, to the one big negative in this bill. With some exceptions, upon the death of an IRA owner the entire balance of the account must be distributed by the end of 10 years. The exceptions are if the primary beneficiary is a surviving spouse, a disabled or chronically ill individual, an individual who is less than 10 years younger than the IRA owner or a child of the IRA owner who has not reached the age of majority.

Appropriations Act
At the end of 2018 and into 2019, Congress debated what are commonly called the tax extenders³, a large group of tax breaks and credits that were first enacted under President George W. Bush and have been extended multiple times since. Ultimately, they were not extended and for tax year 2018 those breaks and credits were no longer available. In the Appropriations Act, those tax breaks and credits were re-enacted for 2019 and 2020. Here are the most common:

• The floor for the deduction of qualified medical expenses has been reduced from 10% of adjusted gross income (AGI) back to 7.5% of AGI.
• Mortgage insurance premiums are deductible as qualified residence interest.
• Renewed the deduction for qualified tuition and related expenses.
• Renewed the plug-in electric vehicle credit.
• Renewed the energy-efficient home credit.
• Renewed the work opportunity credit for employers.

These are just a few of the extenders that affect most taxpayers. The full list of extenders is much longer.

If you have any additional questions on what these tax changes could mean for you and your family, please contact your Exencial advisor or reach me directly at dnorthup@exencialwealth.com.  

Sources:

1. House Committee on Ways & Means – The Setting Every Community Up for Retirement Enhancement Act of 2019 (The Secure Act)
2. WhiteHouse.gov – Statement by the President: Further Consolidated Appropriations Act, 2020
3. Tax Policy Center – What are tax extenders?

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971