New Year, New Tax Laws
Apparently touched by the holiday spirit, Congress was able to work together to pass the “Further Consolidated Appropriations Act” at the end of December. The Act contained many items related to income tax. While its impact will not be as broad as 2017’s Tax Cuts and Jobs Act, the new law has some components that merit a closer look.
Part of the Act addresses “extenders,” tax items that expire annually but which usually get renewed at the end of each year. The anticipated extender law never passed last year, so these items were not available for 2018 tax returns. The new law brings many of them back, even retroactively in some cases.
The mortgage insurance premium deduction was renewed retroactively. Homeowners with less than a 20% down payment are often required to pay MIP (also called PMI by some lenders). This can be treated as mortgage interest and deducted on Schedule A if the taxpayer itemizes. With most choosing the standard deduction, this probably won’t have a big impact, but taxpayers should be aware the deduction is available.
Another retroactive reinstatement was the tuition and fees deduction. Taxpayers with qualified educational expenses may use this deduction to take up to $4000 off their Adjusted Gross Income (AGI). While it’s usually more advantageous to use the American Opportunity or Lifetime Learning credits for education expenses, the tuition and fees deduction can sometimes be claimed when factors such as income phaseout, years in school, or part-time status make the AOC or LLC unavailable. Other factors can sometimes make the tuition and fees deduction a better choice even when other education credits are available; returns should always be figured both ways to insure the best outcome.
Since these extenders are retroactive, taxpayers who would have benefited from them on their 2018 return can file an amendment. Of course, make sure the benefits of amending outweigh the costs. We will review these items with our clients and discuss next steps with them.
The Act includes a continuation of the 7.5% threshold for medical deductions. When itemizing medical expenses, only costs exceeding a stated amount can be deducted. For the past few years this amount has been 7.5% of AGI, but it was set to revert to 10% as of 2019. The new law keeps the 7.5% threshold in place through 2020. Taxpayers who itemize will want to revisit their medical expenses to see if the lowered threshold helps. Doctor’s offices and pharmacies can usually provide a yearly summary of transactions for anyone needing to document expenses. Don’t forget to include other qualifying charges such as certain insurance premiums, dental bills, and mileage. Need help determining what counts? Call us!
A separate part of the new law, the SECURE Act (Setting Every Community Up for Retirement Enhancement) makes changes to retirement plans that may be of interest. Getting the most media attention is the change in age for RMDs (Required Minimum Distributions) from qualified retirement accounts. For many years, mandatory distributions began at age 70 1/2. The Act moves the RMD age to 72. While not a huge change, that extra year and a half makes it a little easier to calculate exactly when distributions must start and offers a little more time to begin taking them.
In the past, contributions to Individual Retirement Accounts (IRAs) had to stop at age 71, even if the person continued working. With the new law, as long as there is earned income, contributions can be made at any age. With more people working part-time in retirement, the option to make IRA contributions should be explored.
Taxpayers celebrating the birth or adoption of a child may now make a penalty-free withdrawal of up to $5000 from qualified retirement accounts. The distribution must occur within one year of the birth or adoption, but there is no requirement that the funds be used specifically for the new arrival. Income taxes will still be due on the amount withdrawn; only the usual 10% penalty is waived by this new law.
Finally, the Act allows 529 College Savings Plans to be used to pay student loan debt. Most people wouldn’t take out a student loan if they had 529 funds available, but the new law allows a sibling’s 529 funds to pay another’s student loan (up to $10,000). This gives parents who saved for a child who decides not to attend college another option for using the funds without penalty.
These are just a few of the many tax provisions in the new law. At Down South we work hard to stay current with all tax laws so our clients don’t have to. If you have a question about any of these new policies, give us a call!