Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

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Daniel F. Rahill, LL.M, CPA, J.D.
Managing Director
Wintrust Wealth Services
 

Beginning with the SECURE Act, signed into law in December 2019, through the three COVID-19 relief packages passed in early 2020 during the global pandemic, this article will provide a high-level overview of these aspects of tax legislative changes you need to know for the 2021 tax filing season.

The SECURE Act
On Friday December 20, 2019, a major overhaul of the rules for retirement plans and IRAs, known as the SECURE Act, was signed into law. Generally effective on January 1, 2020, the bipartisan law is primarily taxpayer friendly, encouraging savings in various ways and making it easier for employers to offer retirement plans. Summarized below are the key changes impacting retirement plans and tax provisions.

Repeal of Maximum Age for Traditional IRA Contributions
The new law ends the age restriction on contributions to a traditional IRA once the individual has attained the age of 70 ½. Therefore, taxpayers with earned income can make IRA contributions at any age beginning in 2020.

Increased Age for Required Minimum Distributions
Under previous law, participants are generally required to begin taking distributions from their retirement plans at age 70 ½. The new law increases the required minimum distribution age from 70 ½ to 72 for people who turn 70 ½ after December 31, 2019.

Penalty-free Withdrawals for Birth or Adoption
While the previous law exempts certain distributions from qualified plans from the 10% tax penalty on early withdrawals prior to age 59 ½, the new law now includes “qualified birth or adoption distributions” as qualifying for such penalty-free withdrawals.

Annuity Portability Options
The legislation permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA.

Allowable 529 Plan Withdrawals Expanded
The new law expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.

Part-time Workers Participation in 401(k) Plans
Except in the case of collectively bargained plans, the new law requires employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either the one-year-of-service requirement (with a 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Increase Credit for Small Business Owners for Start-Up Costs
Prior to the new law, small businesses could claim a credit equal to 50% of the start-up costs of a qualified plan, up to a maximum of $500. The new law increases the credit limit up to a maximum of $5,000 for each of the first three years effective for 2020 and later years.

Automatic Enrollment Credit
To encourage greater employee participation in qualified retirement plans, the legislation creates a new tax credit of up to $500 per year to employers to defray start-up costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under previous law and will be available for three years. The credit will also be available to employers that convert an existing plan to an automatic enrollment design.

Stretch IRA Required Minimum Distributions
Under the new law, “stretch IRA” distributions to individuals other than the account owner’s surviving spouse or minor child, disabled or chronically-ill individuals, or individuals who are less than ten years younger than the account owner are generally required to be distributed within ten years of the account owner’s death.

Other Non-Retirement Tax Law Changes
The Act repealed excise taxes on high cost employer-sponsored health coverage (“Cadillac” plans), the medical device tax, and the fee on health insurance providers. In addition, the estate and trust tax rates applied to certain unearned income of children (the “kiddie tax” provision), have been changed to the parents’ tax rate. Finally, a number of expired tax provisions have been extended through 2020, including the 7.5% (instead of 10%) adjusted gross income floor for medical expense deductions and the above-the-line deduction for qualified tuition and related expenses.

Families First Coronavirus Response Act
On March 18, 2020, President Trump signed the second bipartisan stimulus package, the Families First Coronavirus Response Act. The Act provides for several payroll tax credits for employers to subsidize the impact on small- and medium-sized businesses that have fewer than 500 employees.

Payroll-tax credit for emergency sick leave
The Act requires all public and private employers with fewer than 500 employees to provide those employees two weeks of paid sick time. To help small- and medium-sized businesses cope with the impact of the legislation, the relief bill contained several payroll tax credits for employers. Subject to certain limitations, the Act provides an employer payroll tax credit that equals 100% of the qualified sick leave wages paid by the employer.

Payroll-tax credit for emergency family leave
Subject to certain limitations, the Act provides an employer payroll tax credit equal to 100% of the qualified family leave wages paid by the employer. The credit is available for eligible wages paid during a period that begins on a date starting on a date within 15 days of enactment (to be designated by Treasury) and through December 31, 2020. The credit is generally available for up to $200 in wages for each day an employee receives qualified family leave wages. A maximum of $10,000 in wages per employee would be eligible for the credit.

CARES Act
On March 27, President Trump signed the $2 trillion CARES (Coronavirus Aid, Relief, and Economic Security) Act (H.R. 748). The Act provides for numerous tax, grant, and loan provisions designed to provide financial aid to individuals, businesses, nonprofits, and state and local governments in an effort to address the economic fallout from the pandemic and the steps taken to contain it. While the majority of the CARES Act is aimed at supporting employers, there are a number of significant financial benefits directed to individuals and employees.

Economic Impact Payments
The Act includes relief in the form of immediate cash payments of as much as $1,200 for single taxpayers, $2,400 for married joint filers, plus $500 for each dependent child under the age of 17. They are reduced for higher income taxpayers, with phase-outs beginning at $75,000 for single taxpayers and $150,000 for married joint filers, and ending for single taxpayers with incomes exceeding $99,000 and married joint filers with no children and incomes exceeding $198,000.

The payments are treated as advance refunds of a 2020 tax credit. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they received. This means individuals who did not receive the full amount they were entitled to can claim the difference as a credit on their 2020 return.

Relaxed Retirement Account Rules
Required Minimum Distributions Waived.
The CARES Act also temporarily waives the required minimum distribution requirement from the plan for 2020. This permits those who do not need immediate funds to avoid cashing out investments at depressed values.

Early Withdrawal Penalty Waived.
For individuals qualifying for coronavirus-related distributions as defined below, the 10 percent early withdrawal penalty is waived for distributions up to $100,000 in 2020. In addition, income from such distributions would be subject to tax over three years and the taxpayer may recontribute to an eligible retirement plan within three years without regard to the annual cap.

Borrowing Limits Increased.
Individuals qualifying for coronavirus-related distributions as defined below also have increased borrowing capabilities against their retirement assets. The maximum amount of loans (when combined with existing loans) which can be taken from retirement accounts is the lesser of $100,000 (up from $50,000) or 100% of the participant’s accrued benefit (up from 50%). Repayment of these loans may be delayed for up to one year. This change will be in effect through 2020.

Student Loan Relief
A provision in the CARES Act provides a temporary income tax exclusion for individuals who get student loan repayment assistance from their employer. Through December 31, 2020, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.

Relaxed Charitable Deduction Limits
Above-the-Line Charitable Deduction Introduced.
Taxpayers who do not otherwise elect to itemize deductions are allowed an above-the-line deduction of up to $300 for charitable contributions made in cash (not stock), excluding donor-advised funds.

Limits on Charitable Deductions Increased.
For individuals who itemize, as well as corporations, the CARES Act temporarily increases limitations on deductions for charitable contributions made in 2020. For individuals, the 60 percent of AGI limitation is suspended for 2020. For contributions of food inventory, the limitation is increased from 15 percent to 25 percent. Excess contributions may be carried forward to future years based on the existing charitable contribution carryforward rules.

 

This information may answer some questions, but is not intended to be a comprehensive analysis of the topic.

In addition such information should not be relied upon as the only source of information, competent tax and legal advice should always be obtained.