Once again, Congress enacted, and the president signed, legislation at year-end, barely averting a government shutdown. The 2020 Further Consolidated Appropriations Act (the act), which both funded the government and contained various tax changes, was signed into law on Dec. 20, 2019. Several of the act’s provisions impact tax laws, including provisions relating to retirement plan funding, the “kiddie tax,” and extending numerous expired and/or expiring tax provisions.
One item of note that did not make it into the act was the “depreciation fix” for qualified improvement property, which would reduce the depreciable life from 39 years to 15 years, and thus make it eligible for bonus depreciation. This technical correction must wait.
Some of the key tax changes included in the act are summarized below.
Discharge of qualified principal residence indebtedness
The act extended the exclusion from income provided for qualified principal residence indebtedness, which the IRC defines as “debt incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer,” if the debt is also secured by such residence.
The exclusion previously applied for debt discharged before Jan. 1, 2018, but now applies to debt discharged before Jan. 1, 2021. Taxpayers that experienced a discharge of qualified residence indebtedness should consult their tax advisors regarding a possible amendment of their 2018 income tax return.
Mortgage insurance premiums
Premiums paid for mortgage insurance were, for payments made prior to Jan. 1, 2018, treated as interest payments that were deductible as qualified residence interest (subject to adjusted gross income (AGI) limitations). The act extends this treatment for premiums paid through Dec. 31, 2020.
Reduction in medical expense deduction
For tax years beginning after Dec. 31, 2016, and ending before Jan. 1, 2019, deductions for medical expenses were generally limited to the amount of such expenses that exceeded 7.5% of AGI. The act extends this provision through tax years ending before Jan. 1, 2021. As such, taxpayers with significant medical expenses will continue to benefit from the lower AGI threshold of 7.5% for 2019 and 2020. The AGI threshold will revert to the customary 10% of AGI in 2021.
Deduction for qualified tuition and related expenses
Qualified tuition and related expenses were allowable as “an above-the-line deduction” for tax years prior to Jan. 1, 2018. The amount of the deduction was capped at $4,000 or $2,000 or phased out completely depending upon the taxpayer’s AGI. The act extended this provision to apply through Dec. 31, 2020. Taxpayers that paid qualified tuition expenses in 2018 should consult their tax advisor regarding amending their 2018 income tax return for a potential refund.
The “Kiddie Tax”
Prior to the Tax Cuts and Jobs Act (TCJA), a child’s unearned income was generally taxed at the higher of the parent’s tax rate or the child’s tax rate. The TCJA changed this treatment and taxed a child’s net unearned income by effectively applying the tax rates applicable to the income of trusts and estates. The act reverts to prior law so that a child’s unearned income is again taxed at the higher of the parent’s tax rate or the child’s tax rate. Any taxpayer that paid the “kiddie tax” should review the calculation to determine if an amended return will yield a refund.
While the individual income tax changes included in the act are minor in comparison to changes made as part of the TCJA, their impact will certainly still be felt by many taxpayers. However, many of the individual income tax changes included in the act are extensions of tax provisions previously in effect (with the exception of the change made to the “kiddie tax”). As pointed out above, in some instances it is worth reviewing 2018 income tax returns to determine whether an amendment will yield a refund.
Motorsports entertainment complexes
Motorsports entertainment complexes, if placed into service before Jan. 1, 2018, were provided a depreciable life of 7 years. The act extends this treatment for such complexes placed into service before Jan. 1, 2021. This change can have a significant impact on the amount of depreciation a taxpayer is able to claim, and taxpayers that placed such a facility in service in 2018 should review their 2018 income tax filings to determine if an amended return filing is warranted.
Expensing rules for certain productions
Taxpayers could elect to expense up to $15,000,000 ($20,000,000 in certain cases of low-income or distressed areas) for qualified film, television, or live theatrical productions commenced before Jan. 1, 2018. The act extends this treatment for such productions commenced before Jan. 1, 2021. Taxpayers that incurred these types of expenses should review their 2018 income tax return to determine if an amended return is beneficial.
Nonbusiness energy property
Subject to certain limitations, a credit was permitted for 10 percent of the costs of “qualified energy efficiency improvements” and 100 percent of “residential energy property expenditures.” This credit was limited to $500 per taxpayer for property placed in service before Jan. 1, 2018 (excluding property placed in service after Dec. 31, 2007, and before Jan. 1, 2009). The act extends this treatment to property placed in service before Jan. 1, 2021. Taxpayers that incurred qualified improvement costs have the opportunity to amend their return and receive a refund up to the amount of the maximum credit.
Work opportunity credit
The work opportunity credit was available to employers who hired individuals from certain targeted groups who began work for the employer before Jan. 1, 2020. The act extends the availability of this credit for individuals who begin work for the employer before Jan. 1, 2021.
Energy efficient commercial buildings deduction
For property placed in service before Jan. 1, 2018, subject to certain limitations, taxpayers could deduct the cost of “energy efficient commercial building property” placed in service during the taxable year. The act extends this treatment to property placed in service before Jan. 1, 2021. Building owners should review their 2018 expenditures to see if a “Section 179D” study should be performed in order to claim this accelerated deduction, often referred to as the “Section 179D deduction.”
Energy efficient home credit
The energy efficient home credit allows eligible contractors to claim up to a $2,000 tax credit for construction and sale of each qualified new energy efficient home during the taxable year. The provision was previously only allowable through 2017. The act extends the availability of this credit until Jan. 1, 2021. Home construction contractors should review their 2018 returns to determine whether they were eligible for the credit.
Individuals were required to take minimum distributions from certain retirement plans (employer-provided qualified retirement plans, certain IRAs, and others) when the owner of the plan reached age 70½. For distributions required to be made after Dec. 31, 2019, with respect to individuals who reach age 70½ after that date, the Act increases the age at which required minimum distributions must begin to 72.
The act also ends the 70½ year age limit for making IRA contributions, and shortens the amount of time some beneficiaries of IRAs may take distributions to a maximum of 10 years.
Taxpayers should speak to both their investment advisor and tax professional to understand how these changes impact their income tax position.
As with the above provisions, each of the newly extended items below provides an opportunity to either amend an income tax return or generate prospective tax savings. Impacted taxpayers should consult their tax advisor to ensure an understanding of how these provisions affect their specific tax position.
Depreciable life for race horses
Race horses, if placed into service before Jan. 1, 2018, were provided a three-year depreciable life. The Act extends this treatment for race horses placed into service prior to Jan. 1, 2021.
Empowerment zone tax incentives
The designation of empowerment zones was to remain in effect beginning on the date of designation and ending on Dec. 31, 2017. The act extends the date until which a property can be designated as an empowerment zone to Dec. 31, 2020.
Modification of the tax rate for the excise tax on investment income of private foundations
Private foundations exempt from taxation for carrying on their activities were subject to a 2 percent tax on their net investment income for the taxable year. The act reduces this tax to 1.39 percent for taxable years beginning after Dec. 20, 2019 (the enactment of the act).
Repeal of increase in unrelated business taxable income (UBTI) for certain fringe benefit expenses
Under the TCJA, the value of certain fringe benefits paid by an organization were included in UBTI even though they were not deductible under IRC Section 274. This inclusion applied unless the fringe benefit was directly connected to an unrelated trade or business. The Act retroactively repealed this inclusion in UBTI as of Dec. 22, 2017 (the date of the enactment of the TCJA).
Repeal of the “Cadillac Tax”
The Affordable Care Act instituted a 40% excise tax (commonly called the “Cadillac Tax”) on high-cost health care. The Further Consolidated Appropriations Act has repealed this tax for tax years beginning after Dec. 31, 2019.
What does CohnReznick think?The act enacted by Congress and signed by the president extends numerous tax provisions and makes some notable changes to the present tax landscape. Some of the more impactful changes of the act include the repeal of the “Cadillac Tax,” the reversion of the “kiddie tax” to pre-TCJA treatment, and the increase in the required minimum distribution age for certain retirement plans. Changes wrought by the act are sure to impact many individuals, businesses, and private foundations. Consult your tax advisor to determine how your particular situation may be impacted.
Subject matter expertise
CPA, Partner, Practice Leader, Federal Tax Services
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