The $1.4 trillion year-end spending package passed by Congress and signed into law on Dec. 20 contained an estimated $426 billion (over 10 years) in tax provisions.

This year-end legislation included the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), making significant changes to America’s retirement plan rules. The changes follow:

No upper age limit for IRA investing. The SECURE Act repealed the prohibition on contributions to a traditional IRA by an individual who has attained age 70½. Now, individuals of any age may contribute to a traditional IRA. This change applies to contributions made in taxable years beginning after Dec. 31, 2019.

RMDs may begin later. The new law changed the rules for required minimum distributions. An RMD is the minimum amount that an investor must withdraw from his or her retirement account each year once a certain age is met. RMDs have generally been required to begin by April 1 of the year following the calendar year in which the owner reached age 70½.

The new law delays this requirement to require an RMD by April 1 of the year following the calendar year in which the owner reaches age 72. The law did not change for those who reached age 70½ before Jan. 1, 2020. These individuals must still take an RMD by April 2020. Those who reach age 70½ after 2019, however, may delay their RMDs until age 72.

The rules did not change for qualified charitable contributions. In other words, IRA owners may still begin making QCDs from their IRAs beginning at age 70½.

Restriction of stretch IRAs. The new law also changed the RMD rules for defined contribution plans and IRAs upon death of the employee or owner. Prior law provided that if the owner died before the beginning of the RMD period, distributions to designated beneficiaries had to begin within one year of the owner’s death and were to be paid over the life or life expectancy of the designated beneficiary.

If the designated beneficiary was a surviving spouse, distributions could be delayed until the year that the owner would have reached age 70½. If the surviving spouse died before the employee or owner would have attained age 70½, the after-death rules applied as though the spouse were the employee or the owner.

These rules allowed IRA distributions to be stretched out post-death if the owner named a young person, such as a grandchild, as the designated beneficiary. After the death of the owner, the payout to the grandchild could be stretched out over the beneficiary’s life expectancy, thereby reducing tax liability significantly. The new law ends most stretch IRAs.

Under the new law, the remaining balance of a retirement account must generally be distributed to designated beneficiaries within 10 years after the date of death. This applies regardless of whether the owner dies before or after RMDs have begun. There is an exception from the 10-year rule for distributions to “eligible beneficiaries,” which include:

This special exception rule allows distributions to “eligible beneficiaries” to be made over the life or life expectancy of the eligible beneficiary beginning in the year following the year of death. In the case of a child who hasn’t reached the age of majority, calculation of the RMD under the exception is only allowed through the year the child reaches the age of majority. The 10-year rule applies after a child reaches the age of majority. Prior law applies to distributions to surviving spouses. These provisions are generally effective for RMDs with respect to employees or owners with a date of death after Dec. 31, 2019.

Withdrawals for birth or adoption of child. Distributions from retirement plans are generally subject to a 10% early withdrawal tax if received by an individual before age 59½. The new law allows individual taxpayers to withdraw up to $5,000 (per spouse) from an eligible retirement plan, without penalty, to pay expenses related to the birth or adoption of a child. The provision applies to distributions made after Dec. 31, 2019.

‘Kiddie tax’ changes

Lawmakers don’t always anticipate the consequences that a new law may have. The Tax Cuts and Jobs Act of 2017 modified the so-called “kiddie tax” rules to tax a child’s earned income under the rates for singles and to generally tax unearned income under rates applicable to trusts and estates. Prior to TCJA, unearned income of children was generally taxed at the rate of their parents. The change was primarily made to simplify the kiddie tax calculation so that it was not dependent upon the returns of the parents.

As soon as TCJA went into effect, it was evident the changes in the kiddie tax negatively impacted many children, including those with a parent killed while in active-duty military service and those who received scholarships covering room and board. Suddenly, the income of these children was being taxed at very high rates. In response to this problem, the new law repeals the kiddie tax changes made by TCJA and reinstates the rules that existed before 2018.

The repeal of the kiddie tax changes is effective for tax years beginning after Dec. 31, 2019, but taxpayers can elect to apply the change to tax years beginning in 2018, 2019 or both.

Medical expense deduction

Although TCJA eliminated many itemized deductions, taxpayers may still deduct extraordinary medical expenses. For 2017 and 2018, this included medical expenses exceeding 7.5% of a taxpayer’s adjusted gross income. This percentage was supposed to increase to 10% in 2019.

In other words, taxpayers could only have deducted medical expenses that exceeded 10% of their AGI. The new law again lowers the medical expense deduction floor from 10% to 7.5% for all taxpayers for tax years 2019 and 2020.

Other notable changes

In addition to these changes, the new law retroactively extended several popular tax benefits, including:

Principal residence. The provision excluding from gross income the discharge of qualified principal residence indebtedness was revived, retroactively, through Dec. 31, 2020.

Mortgage insurance. The provision allowing premiums paid for qualified mortgage insurance to be deductible as interest was revived, retroactively, through Dec. 31, 2020.

Tuition. The above-the-line deduction for qualified tuition and related expenses was revived, retroactively, through Dec. 31, 2020.

Biodiesel credit. The biodiesel and renewable diesel credit that expired at the end of 2017 was extended retroactively through the end of 2022.

For more information on these and other changes of interest, visit the Center for Ag Law and Taxation.

Tidgren is an attorney and director of the Center for Ag Law and Taxation at ISU. Contact her at [email protected].