Highlighting the tax provisions of the newly enacted Further Consolidated Appropriations Act, 2020 (the Act), the IRS has encouraged taxpayers to save for retirement. The Act includes a number of tax changes such as the retroactive renewal of some tax benefits that expired at the end of 2017. Eligible taxpayers can claim these benefits when they file their 2019 income tax returns. Further, the taxpayers may also qualify to claim some tax benefits for 2018 by filing an amended return. Publication 17, Your Federal Income Tax, features an in-depth look at on tax changes for 2019 including recent legislative changes and covers the general rules for filing a federal income tax return.
Contributing to a Traditional IRA
The Act has eliminated the long-standing 70-and-a-half age limit for making contributions to traditional (Individual Retirement Arrangements) IRAs. Further, there is no age limit for contributions to a Roth IRA.
Required Minimum Distributions
Taxpayers with traditional IRAs, as well as 401(k) plans and other workplace retirement plans, may be able to wait until they turn age 72 before taking required minimum distributions (RMDs) from their IRAs and plans. For those who turned age 70-and-a-half prior to January 1, 2020, their RMDs must begin by April 1 of the year after they turned age 70-and-a-half. Moreover, for those who were age 70-and-a-half or younger on January 1, 2020, their first RMD is not due until April 1 of the year after they turn age 72.
Birth or Adoption of a Child
An IRA owner or a participant in a workplace defined contribution plan can withdraw up to $5,000 for the birth or adoption of a child without incurring the usual 10-percent additional tax on early distributions. The distribution must be made within one year after the child is born or the adoption is finalized and cannot be from a defined benefit plan.
New Rules for Beneficiaries
Fewer beneficiaries of IRAs and workplace retirement plans would qualify to receive distributions over their lifetime. The old distribution rules continue to apply where the IRA owner or plan participant died before 2020, except a special rule applies to distributions after the death of a beneficiary who dies after 2019.
More expenses now qualify for tax-free and penalty-free withdrawals from a qualified tuition program, also known as a 529 plan. Amounts can be withdrawn to pay principal or interest on a designated beneficiary’s or their sibling’s student loan. In addition, a 529 plan can now be used to pay qualifying expenses for a designated beneficiary to participate in an apprenticeship program that is registered and certified by the U.S. Department of Labor. Since, these changes are retroactive to 2019, any distributions during 2019 that meet these guidelines also qualify for tax-free and penalty-free treatment.
Tax Benefits Extended Through 2020
Tax benefits such as the tuition and fees deduction, the deduction for mortgage insurance premiums for eligible homeowners, the exclusion for debt cancelled on a principal residence and the nonbusiness energy credit for homeowners who install energy-efficient windows, doors, insulation and furnaces that expired at the end of 2017 have now been extended through 2020. As a result, eligible taxpayers can claim them on the 2019 return they are filing this tax season. In addition, eligible taxpayers can claim them on an amended return (Form 1040X) for 2018.