2019 Tax Filing Season and Beyond – Items to Consider

Our firm always strives for a proactive approach to tax planning. While it’s been more than a year since the Tax Cuts and Jobs Act went into full effect, many taxpayers are still relatively uncertain of how these changes impact them. The 2019 and 2020 tax seasons could be the season that we see old problems resurface and a set of new issues emerge. Below are some of the items we would like our clients to be aware of for 2019 and beyond. Please note, that this article does not contain a complete list of provisions and rules for the items listed below. If you think something pertains to you, please discuss it with your tax preparer for additional guidance on the issue.

The Individual Mandate Penalty
Most of the changes stemming from the Tax Cuts and Jobs Act went into effect during 2018. However, a few didn’t become active until 2019. The shared responsibility payment is one of these. The shared responsibility payment, which is commonly referred to as the individual mandate penalty, was previously introduced under the Affordable Care Act. It essentially required people to have some form of health insurance (Obamacare, private or otherwise). If a taxpayer couldn’t prove they had health insurance, they owed a penalty with their taxes.
Starting with fiscal year 2019, there’s no longer a federal penalty. However, there can still be a state based penalty for some states (Washington is not one of these states).

Changes to Retirement Contribution Limits
Taxpayers are now able to stash away more money in a tax-advantaged retirement account, which could allow individuals to lower their tax burden. Here is a breakdown of the changes:
– The 401(k) base contribution is up to $19,000.
– The catch up contribution for those over age 50 remains unchanged at $6,000.
– The IRA base contribution (whether Roth or Traditional) is up to $6,000.
– The IRA catch up contribution for those over age 50 remains unchanged at $1,000.

Also note, you have until the due date of your tax return to make a contribution to an IRA. Be sure to talk to your tax preparer about the possibility of saving money on your tax return by funding your IRA before April 15th.

Changes to HSA Contribution Limits
In addition to increasing the amount of money taxpayers can contribute to qualifying retirement plans, health savings accounts also saw a boost this year. For those with high-deductible policies that qualify under HSA guidelines, the changes are as follows:
– Self-only coverage is now $3,500 for 2019.
– Family coverage is now $7,000 for 2019.

Similar to an IRA, you also have until the due date of the tax return to fund your HSA for 2019.

Key Components of the SECURE Act of 2019
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law by President Trump. The SECURE Act expands opportunities for individuals to increase their savings and makes administrative simplifications to the retirement system. The Key developments we would like people to be aware of are as follows:

– The maximum age for traditional IRA contributions has been repealed beginning in 2020. People over age 70 1/2 can now continue to make qualified tax deductible contributions to a traditional IRA.
– The required minimum distribution age has been raised from 70 1/2 to 72 as of 2020. For those who attain age 70 1/2 prior to 12/31/19, they will still be subject to the old required minimum distribution rules.
– Post-death required minimum distribution rules are modified after 2019. Generally effective for distributions with respect to employees (or IRA owners) who die after December 31, 2019, the SECURE Act modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances (including annuity contracts under defined contribution plans) upon the death of the account owner such that the account balance must be distributed within 10 years. As with most tax legislation there are exceptions to this rule. Be sure to talk with your preparer for additional guidance if this applies to you.
– 529 Plans have been expanded to allow distributions of up to $10,000 (lifetime limit) to cover registered apprenticeships and repayment of student loans. Any student loan interest that is paid out of a 529 plan will be disqualified for the student loan interest deduction.
– Under the SECURE Act, taxpayers may qualify for exemption from the 10% tax penalty on early distributions from qualified plans (after 12/31/19), if they are for qualified birth or adoption expenses. There are limitations on what constitutes an eligible adoption as well as the amount of the distribution that qualifies for penalty exemptions.
– For tax years beginning after 12/31/19, the Act creates a new tax credit of up to $500 per year to employers for new IRC Sec. 401(K) and SIMPLE IRA plans that include automatic enrollment.
– The Act repeals the kiddie tax measures that were added by the TCJA. As a result, the unearned income of children is taxed under the pre-TCJA rules and not at trust (or estate) rates. A child will once again be taxed at the parents’ rates on net unearned income if higher than the child’s rates.

Additional Clarification on Section 199A – Qualified Business Income Deductions (QBID) for Rental Property Owners:
One of the favorite provisions under the Tax Cuts and Jobs Act, was the creation of the Qualified Business Income Deduction (QBID) under Section 199A. This provision provided for up to a 20% deduction on certain business income. A question being asked by many tax practitioners and their clients over the last year was, “Does this deduction apply to rental income?” The answer has been clarified during 2019 by the IRS, and that answer, in certain instances, is “Yes.” Rental activities may participate in QBID in one of three ways:
– If your rental qualifies under the definition of a trade or business as defined in IRC Sec. 162.
– Under Reg 199A-1 and the so called “Self Rental Rule”.
– By making the Rev. Proc. 2019-38 Safe Harbor Election.

The complexities of the items mentioned above are too complex for the scope of this article. However, the take away is that if you own one or more rental properties, be sure to talk with your preparer to see if you might qualify for this type of tax deduction.

Other Important Items to be Aware of:

– The Social Security Wage base has been increased to $137,700 for 2020 (maximum tax of $8,537.40).
– The deduction of qualified mortgage insurance premiums that are deductible as mortgage interest have been extended.
– The deduction of qualified tuition and related expenses (maximum of $4,000) has been extended through 2020.
– The reduced medical expense deduction floor of 7.5% for itemizing medical expenses has been extended through 2020.

The items listed above are not all inclusive of the changes in effect this year. Be sure to ask your tax preparer about anything you have a question on. A little tax planning goes a long way!