New Year – And some New Tax Rules

Happy 2020!  All of us here at PFA pass along our best wishes for you in the coming decade.  May the 20’s really be ‘roaring’ (and may they not end like the 1920s did!) 

Right off the bat, we’ve got an interesting new set of tax rules to learn.  In addition to some routine updates to numbers, a whole new Tax Act came into being at the end of 2019.  

First, a few numbers that are updated for the 2020 tax year:  

• If you are in a defined contribution plan like a 401(k) or a 403(b), you can contribute more.  $19,500 is the new limit, up from $19,000 last year.  If you are over 50, you may be able to use ‘catch-up’ provisions to contribute an additional $6,500 in 2020. 
• ‘Standard Deductions’, which are used by the vast majority of tax filers, go up to $12,400 for single people and to $24,800 for married couples who file jointly. 
• There is an estate and lifetime gift-tax exemption of $11.58 million in 2020, per person.  That’s up from the ‘mere’ $11.40 million that was exempted from estate taxes in 2019! 
• Tax brackets have also increased, so you’ll need more income to hit higher tax brackets. 
• There are higher income levels to qualify people to make either deductible IRA contributions or Roth IRA contributions. 

There are some items that have NOT changed in 2020, including:  

• The limit on how much you can contribute to an IRA.  That’s still $6,000 (or $7,000 if you’re over 50). 
• The annual gift-tax exclusion.  That remains the same as in 2019: $15,000 per person, per gift recipient. 

The SECURE Act of 2019 

On December 20, President Trump signed into law a bipartisan supported bill called the ‘Setting Every Community Up for Retirement Enhancement Act’, resulting in the most awkwardly forced acronym in the history of tax rules:  The SECURE Act.  (At least it’s easier to pronounce than the 1973 Employee Retirement Income Security Act, or ERISA or the completely unpronounceable 2017 Tax Cuts and Jobs Act, or TCJA.) 

The SECURE act giveth in some areas and taketh away in others.  First, the good news: 

• Required Minimum Distributions (RMDs) no longer start at age 70 1/2.  They now start at age 72.  This allows for more years of tax deferral for people with tax-deferred accounts.  Importantly, if you turned 70 ½ before January 1, 2020, you are still required to follow the age 70 ½ rule. 
• Retirees over age 70 ½ have not been allowed to contribute to a deductible IRA.  Under the new law, they can do so, subject to income limits and their access to an employer-based plan. 
• People over 70 ½ can still make qualified Charitable Distributions of up to $100,000 per taxpayer per year, but this may be limited if they are also making deductible IRA contributions.

And the bad news:  

• Non-spouse beneficiaries who inherit IRAs are now a bit more limited in how long they can stretch out distributions from these inherited accounts.  While they had the ability to stretch withdrawals over the course of their lifetime, they must remove everything from the inherited account within 10 years.  This results in higher distributions over a shorter time, likely resulting in more taxation for many.  Keep in mind that this only applies to people who inherited tax-deferred amounts from someone who died AFTER January 1, 2020, not someone who is already stretching distributions from prior to that period. 

All told, the changes for 2020 are relatively minor, but could still wind you up in a sticky situation if you fail to adhere to new rules, especially where Required Minimum Distributions for heirs are concerned.  Make sure you ask your tax advisor if you sense that any of these issues might apply to you. 

Happy 2020!