There is another new law

by Stanton B. Herzog, CPA

Stanton B. Herzog, CPA, principal in the firm of Applebaum, Herzog & Associates, P.C., Northbrook,Ill., serves as ERA’s accountant and is a regular contributor to The Representor. He is available to speak at chapter or group meetings on a variety of financial and tax-related topics. He also participates in Expert Access, the program that offers telephone consultations to ERA members. You can call Stan Herzog at 847-564-1040, fax him at 847-564-1041, or e-mail him at sherzog@theahagroup.com.

In December 2019, Congress passed an extension to the debt which, because of the increase in the size of the debt, caused some publicity. Almost totally overlooked by the press was a major section devoted to changes in the tax law. Interestingly, almost all of the changes will increase the national debt to the advantage of businesses and retirement opportunities. So, here we go.

Let’s start with autos. A couple of major changes occurred in the 2017 law, with a warning. New cars bought in 2019 have a tremendous opportunity for deduction by taking the normal depreciation. The first-year depreciation is slated for $18,000 and the second year $16,000 for “luxury” automobiles under 6,000 pounds and not a sport utility vehicle. Subsequent year depreciation is $5,760 per year.

It is possible to write off a truck (vehicle over 6,000 pounds) in one year but beware of a couple of things. First, do not elect Section 179 first year write-off. For some reason, you get an $18,000 write-off in the first year and nothing in the next five years. Second, the itemized deduction for autos on personal returns is still not allowed so these rules only apply to businesses — corporations, partnerships, sole proprietors.

For 2020 the standard mileage rate for “luxury” vehicles is 57.5 cents per mile, down a half-cent from 2019. Again, this is the amount for businesses and cannot be used on Schedule A of form 1040. For medical purposes, the rate is 17 cents per mile, down 3 cents from 2019. The charity mileage rate is 14 cents per mile. A daily listing of business mileage is still required upon IRS audit.

One of the more important provisions of the new tax law lowered the medical expense deduction floor from 10% back to 7.5% of adjusted gross income for the years 2019 and 2020. The rate was 7.5% in 2018, so the rate will remain the same for last year and this year at least.

Retirement provisions were among the most important parts of the law, both good and bad. First, participants in IRA plans could not contribute to an IRA after age 70.5; but from now on, that limitation has been repealed – there is no age limit while making IRA deductions.

At the same time, a rather weird change in the law refers to the right of making contributions to qualified charities out of retirement plans and using those funds to reduce the taxability of part or all of their required minimum distribution (RMD). The legal limit was $100,000 per year. The new law made it $100,000 for lifetime, reduced by all such contributions made after age 70.5. That is further interesting in view of the fact that the beginning date for RMDs was raised from 70.5 to 72 after Jan. 1, 2020. Those who turned 70.5 in 2019 must withdraw.

If you think that’s complicated, consider the revised retirement plan distribution rules for beneficiaries. They were fairly straightforward. If the beneficiary was named in the plan, the beneficiary was required to withdraw from the plan upon death of the account owner based upon their own attained age in the IRA withdrawal chart. Thus, a 53-year-old person would take his/her share of the balance in the plan and divide by 14.3. The following year it would be 13.3, then 12.3, etc. Minimum distribution rules do not apply to Roth IRAs. The rule for spouses is unchanged — they can role the funds into their own plan. If there is no named beneficiary, funds had to be removed over a five-year period. That’s the short-short description of the way it was.

Now, the five-year rule was extended to 10 years. The calculation for named beneficiaries was eliminated except for people less than 10 years younger than the deceased, cases of disability or minors. This means that all children of the deceased will be required to withdraw their funds within 10 years with the above exceptions. The rule is applicable for all people dying after Dec. 31, 2019; rules for people already dead are not affected apparently because they appear unwilling to change their plans. It is always possible that the IRS could hire several hundred fortune tellers to communicate with the dead.

We now turn to the other side, the company side, of retirement plans. The primary change affects 401(k) and profit-sharing plans, also known as defined contribution plans. Hitherto the way employees entered the plan was after a year of 1,000 hours of service, with an opportunity to enter at the earlier of the beginning of the next plan year or six months after qualifying. The new rule regards part-time employees who have worked 500 hours or more for three years. Upon attaining that record, they must be admitted into the plan on the same basis as above. However, they may still not be completely equal to their full-time counterparts. The company does not have to include them in non-elective and matching company contributions. Of course, the company can elect to include them.

Other changes include allowing a defined contribution to be decided after the end of the plan year and before filing the tax return, including extensions. There is also a new requirement for “disclosure.” Companies will be required to inform employees once per year on how much their lifetime stream of payments would amount to. How to construct the “lifetime stream” will be decided by the Secretary of Labor based upon the lifetime expectancy of a single employee, or a married employee with the plan continuing with the last to die.

Moving on, most of the energy credits were extended retroactively through 2020. An amended return would be required for 2018 if you made improvements to your residence or commercial buildings that would have otherwise qualified.

Qualified tuition and related expenses deductions are back retroactively to 2018 up to a maximum of $4,000 for those with adjusted incomes up to $65,000 single, $130,000 filing joint, and $2,000 for those whose adjusted income is above that, up to $80,000 single, $160,000 joint. If you qualify, an amended return for 2018 would be required.

The kiddie tax has been restored to being computed the old way. It takes effect for years beginning after Dec. 31, 2019, although you can make an election to apply it retroactively to 2018 or 2019.

Health changes include the elimination of two taxes originated in the Affordable Care Act. One for so called Cadillac plans and one for manufacturers of medical devices, neither of which ever went into effect.

Penalties have been increased again to approach being prohibitive. A tax return filed more than 60 days late will incur a penalty of the lesser of $435 or 100 percent of the tax due. However, the tax for filing a form 5500 (retirement plan form) has been increased to $250 per day late to an impossible maximum of $150,000.

There are a number of additional tax law changes that just can’t be discussed in this article.