January 24, 2020
New Year, New Tax Laws: How Key Changes May Affect You
As 2019 drew to a close, Congress enacted a slate of new tax laws that will impact you in 2020 and beyond. Below is a summary detailing a few of these key changes that may have lasting implications on your tax situation. While this is not an exhaustive list, we hope that it provides you with a preliminary framework as to how these new laws may be impacting you.
Qualified Opportunity Zone Funds
Recently issued IRS regulations also created new developments for Qualified Opportunity Zone Funds, more colloquially termed by the acronym “QOZFs”. QOZFs were developed in 2018 to spur investments in economically distressed areas throughout the United States and, along with helping reinvigorate distressed areas, investors have utilized QOZF’s as a means of deferring and potentially reducing tax on capital gains. If the fund is held over 10 years, any tax on the appreciation from the original QOZF investment is eliminated. Note that tax on the original deferred gain (subject to applicable basis step-ups) will be triggered on December 31st, 2026. Investors who wish to use gains from partnerships or other flowthrough entities to make QOZF investments will now have until September 30th to fund their capital calls. Previously, investors only had six months (180 days) from the entity’s year end to fund these amounts.
Also, effective January 1, 2020, taxpayers who have 1231 gains from real estate and other trade/business sales can invest these gains in a QOZF without netting them against 1231 losses as long as the QOZF investment is made within six months of the 1231 gain transaction. Prior to the Act, taxpayers were required to net 1231 gains & losses to determine qualified funding amounts for QOZF’s. The IRS further clarified that installment sale funds received from trade or business dispositions are eligible for investment in QOZF’s regardless of when the sales transaction occurred and even if the first installment payments were received prior to the implementation of the Opportunity Zone legislation. Please note that California has not conformed to the Qualified Opportunity Zone legislation.
IRAs and Distributions
If you contribute to a retirement savings account, read on. Congress has made critical changes to IRA contribution rules under the Consolidated Appropriations Act of 2020.
- The maximum age for making traditional IRA contributions was repealed. Contributions to IRAs are allowed without age considerations. Prior to 2020, traditional IRA contributions were not permitted once you reached the age of 70½.
- The Required Minimum Distribution Age has been raised from 70½ to 72. Prior to 2020, retirement plan participants and IRA owners were required to begin taking Required Minimum Distributions (RMD) from their plans by April 1st of the year following the year they reached the age of 70 ½.
- “Stretch IRAs” have also been partially eliminated. If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally permitted to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the life or life expectancy of the beneficiary – hence the term “Stretch IRA.” However, for deaths of plan participants or IRA owners beginning in 2020 distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. That means the “stretch” strategy is no longer allowed for those beneficiaries. However, there are some exceptions to the 10-year rule. Note that it’s still allowed for the following individuals: surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who is not more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under these exceptions may generally still take their distributions over their life expectancies.
- Penalty-free withdrawals are now allowed for birth or adoption expenses. A distribution from a retirement plan must generally be included in income. And, with certain exceptions, a distribution before the age of 59½ is subject to a 10% early withdrawal penalty on the amount, includible in income. Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. The $5,000 amount applies on an individual basis. Accordingly, a married couple may receive a penalty-free distribution up to $10,000 for a qualified birth or adoption.
The Tax Cuts and Jobs Act, enacted late in 2017, changed how the income of dependent children is taxed, causing a child’s unearned income to be taxed at fiduciary rates that can easily reach the maximum tax rate of 37%. As an example, a child with over $2,200 in unearned income in 2019 can be taxed at the 37% rate. Under the recently enacted Consolidated Appropriations Act, the tax rate for a child’s unearned income has reverted to the parents’ tax rate (pre-tax reform method). Under the Act, taxpayers can also elect to apply pre-tax reform rules to use the parent’s rates for a child’s unearned income for the 2018 year (with the filing of an amended return) and the 2019 year. California had never conformed to the Tax Cuts and Jobs Act of 2017, so the reversion of the kiddie tax back to the parent’s tax rate has brought the Federal in closer parity once again with California.
Private Foundation – Update to Excise Tax Rate
Effective January 1, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2019, the private foundations excise tax rate, has changed to a flat rate of 1.39%. Previously, private foundations had a two-tiered structure: 2% excise tax on investment income or 1% depending on the average 5 year distribution rate. Although this new law means that private foundations will no longer qualify for the 1% excise tax, it stream-lines the calculation process for foundations, reduces the overall administrative burden, and allows private foundations to increase distributions in times of need without incurring a penalty.
We are here to help in 2020 and beyond.
Please contact us for more information about any of these recent developments. We are happy to answer any questions you may have about your specific tax situation in relation to new and upcoming tax updates. It is our goal as trusted advisers to provide you with proactive tax planning strategies that can help you minimize your tax exposure and maximize your tax benefits from these new laws. We look forward to working with you in the New Year!
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