Tax Reform and Beyond: Tax Law Changes for the 2020 Tax Filing Season

DECEMBER 5, 2019

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As you know, the Tax Cuts and Jobs Act (TCJA) was signed into law in 2017. Most of the measures were effective beginning in tax year 2018, and many individual measures contain a sunset date at the end of 2025. Here’s a summary of the TCJA provisions, along with other tax changes that are effective beginning in tax year 2019.

Changes to Tax Forms

• Form 1040: Condensed to Schedules 1, 2 and 3; Schedules 4, 5 and 6 are eliminated.
• Form 1040-SR: A new, simplified two-page form for seniors.
• Form 8995, Qualified Business Income Deduction Simplified Computation (instead of Form 1040 worksheet).
• Form 8995-A, Qualified Business Income Deduction (instead of Publication 535, Business Expenses, worksheets).
• Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.: Regarding the Qualified Business Income (QBI) deduction, each trade or business is reported separately, and income and deductions comprising QBI are broken out for S corporations, for example.
• Retired tax forms:
• Schedule C-EZ
• Form 2555-EZ, Foreign Earned Income Exclusion
• Form 8965, Health Coverage Exemptions

New Form W-4 for 2020

The primary goals for redesigning Form W-4, Employee’s Withholding Certificate,  was to provide simplicity, accuracy and privacy for employees, while minimizing the burden for employers and payroll processors. The final version of the form was released in November 2019 and will be used starting in 2020. The IRS continues to encourage people to do a Paycheck Checkup as soon as possible, especially if they had too much or too little tax withheld in 2019. The IRS launched a new Tax Withholding Estimator, a redesigned, online tool that makes it easier to have the right amount withheld.

Alimony

Under the new law, for divorce or separation agreements executed after Dec. 31, 2018, alimony and separate maintenance payments are no longer deductible by the payer or included in income of the recipient. For agreements executed before 2019 and modified after 2018, the modification needs to expressly state that the new rules will apply; otherwise, the prior alimony rules will govern.

Affordable Care Act

We’re seeing a very large component of the Affordable Care Act (ACA) going away! Beginning in 2019, individuals won’t have to pay a federal penalty for not being covered by insurance or by an exemption, and the individual shared responsibility payment has been permanently reduced to zero going forward. For tax years 2016-2018, the penalty was the greater of $695 per individual or 2.5% of household income. Please remember that a handful of states invoke a penalty for not having insurance – and this may not change.

Taxpayers will continue to receive Forms 1095-A, B and C containing information about insurance coverage, and should keep these forms with their records. Taxpayers who purchase insurance coverage through the marketplace will continue to receive Form 1095-A, Health Insurance Marketplace Statement, which provides information necessary to compute the Premium Tax Credit.

The following elements of ACA are not changing:

• Premium tax credit: Taxpayers falling within 100%-400% of the federal poverty level may be eligible for the credit.
• Employer mandate: Employers with over 50 employees are required to provide employees with healthcare coverage or face a penalty.
• Surtaxes on high-income taxpayers:
• 3.8% net investment income tax
• 0.9% additional Medicare tax

Medical Expense Deduction

The itemized deduction for medical expenses is subject to the elevated 10% adjusted gross income floor for regular tax and alternative minimum tax (increased from 7.5% of adjusted gross income for tax year 2018). The change is less beneficial to taxpayers. However, many taxpayers are no longer itemizing deductions due to the increased standard deduction.

Tax Treatment of State and Local Tax Limits, and State and Local Tax Refunds

The IRS clarified the tax treatment of state and local tax refunds that arise from any year the new state and local tax deduction limit applies. The ruling impacts state tax refunds received in 2019 and going forward. Beginning in 2018, the itemized deduction for state and local taxes is limited to $10,000 (if $5,000 married filing separate).

State and local tax refunds are not taxable if the taxpayer takes the standard deduction in the year the tax is paid. If the taxpayer itemizes deductions on Schedule A, all or part of the refund may be taxable in the following year to the extent a tax benefit is received. You need to help your clients figure out how much they would have deducted had they paid the actual liability; the revenue ruling provides four examples.

Virtual Currency

Under Notice 2014-21, virtual currency such as Bitcoin is considered property for federal tax purposes; it is recognized as a capital gain or loss on the sale. If virtual currency is received for performing services, your clients would recognize ordinary income equal to the fair market value of the virtual currency.

Newly issued Revenue Ruling 2019-24 established the following rules:

• Cryptocurrency: A type of virtual currency where the transactions are digitally recorded on a distributed ledger, such as blockchain.
• Hard fork: A protocol change and results in a permanent diversion. A new cryptocurrency and new distributed ledger are created, in addition to the legacy system. However, the taxpayer does not receive income in a hard fork alone.
• Airdrop: Cryptocurrency units are dispersed to the distributed ledger addresses of multiple taxpayers. This results in income to taxpayers, since they receive new currency.

Let’s say the taxpayer owns 100 units of Crypto A. Crypto A experiences a hard fork and Crypto B is created. 50 units of Crypto B are airdropped to the taxpayer. The taxpayer must report ordinary income equal to the fair market value of Crypto B.

Electric Car Credit

The plug-in electric drive motor vehicle credit was enacted in 2008 for eligible passenger vehicles and light trucks. You can pay a premium by purchasing one of these cars, so the credit makes them more affordable. Depending on the model of the car purchased and your client’s tax situation, they can get an electric vehicle credit up to $7,500, plus any state or local incentives. Each vehicle manufacturer is allowed to sell up to 200,000 vehicles before the credit begins to phase out. The total is by manufacturer not by brand.

• For General Motors (Chevrolet Bolt EV, for example) the credit began to phase out on April 1, 2019.
• For Tesla, the phase out of the tax credit began on Jan. 1, 2019.

Taxpayer First Act of 2019

This newly passed law gives taxpayers additional safeguards. Beginning Aug. 16, 2019, the IRS may not contact any person other than the taxpayer regarding the determination or collection of a liability without giving the taxpayer a 45-day notice. Also, beginning on Jan. 1, 2020, the IRS must notify a taxpayer if there is suspected, unauthorized use of a taxpayer’s identity.

The IRS plans to issue regulations by Jan. 1, 2020 that will allow taxpayers to report when a refund was not electronically transferred into the taxpayer’s account, to coordinate with financial institutions to recover the payment, and ensure the refund will be delivered to the correct account.

Thanks to MIKE D'AVOLIO, CPA, JD for this information!

SEP is a good way to save for retirement!

2019 SEP IRA Limits

Millions of workers have access to 401(k) plans at work. But often, smaller businesses don't have the capacity to have a plan that's as complex as a 401(k). For them, SEP IRAs can be a great choice that offers many of the same benefits without all the administrative hassle that a 401(k) plan entails.Every year, the amount that one can contribute to a SEP IRA goes up with inflation, and recently, the IRS announced that SEP participants would be able to set aside $1,000 more during 2019 than they were able to save in 2018. With a simple yet effective approach, SEP IRAs deserve a closer look among companies that think they can't give their workers a retirement plan.

IMAGE SOURCE: GETTY IMAGES.
Here's what's happening in 2019 to SEP IRA limits
The biggest advantage of SEP IRAs is that they let employers make huge contributions toward their workers' retirement savings. SEPs can get set up to contribute up to 25% of salary up to an annual maximum, and that amount is going up in 2019. Maximum contributions are $56,000 in 2019, up from $55,000 in 2018 and marking the third straight year of annual increases.
Self-employed workers are also allowed to use SEP IRAs, but for them, the calculation of the 25% limit is a bit more difficult. That's because the IRS forces employers to use 25% of net self-employment income, which one must calculate after accounting for the reduction in income from the SEP contribution as well as for other obligations such as self-employment taxes. The net impact is that contributions for self-employed individuals are generally limits to a number that's slightly less than 20% of original gross income before accounting for the reductions.
Why SEP IRAs are worth a closer look
401(k) plans are complicated, and that keeps many small businesses from ever pursuing them. With so many administrative and regulatory requirements, having a 401(k) can be a full-time business. By contrast, SEP IRAs-short for Simplified Employee Pension Individual Retirement Arrangements -- don't have all of the obligations that 401(k) plans entail. The clearest example comes when you form an SEP IRA. All it takes is a single form for the IRS, and that's far less than the pages and pages of plan adoption agreements and related material that employers of all sizes have to look through in order to set up a 401(k) or similar retirement plan.
It's also easier for small employers and self-employed people to find help with an SEP IRA. Most financial institutions have streamlined procedures to open SEP IRA accounts. Moreover, once money's in the account, it's typically easier to invest, with financial institutions giving their clients a wide range of investments from which to choose and shape a retirement portfolio.

The biggest drawback of a SEP IRAs
The largest difference between SEP IRAs and most other retirement plans is that all of the contributions for a SEP IRA come from the employer. Most of the time, employees are the ones making the lion's share of retirement contributions, with employer matching or profit sharing contributions being relatively small. Because employee contributions aren't allowed, catch-up contributions aren't given to those 50 or older either. Unless an employer is truly committed to making the most of an SEP IRA, it can be frustrating for workers who really want to max out their retirement savings.

That's a big reason so many self-employed workers use SEP IRAs. Because the self-employed person is both employer and employee, it makes no difference which one the IRS requires you to make. Yet here, too, there's a downside: If you want to make a contribution on your own behalf as the business owner, then you have to make the same percentage contribution on behalf of any employee you have. Put another way, you're not allowed to discriminate against other workers for your own benefit. The only exception is that you don't have to allow new workers into the plan until they've worked a minimum amount of time.
Is a SEP IRA right for you?

SEP IRAs aren't for everyone, but if you want to save as much as you can, they have some definite value. If putting aside $56,000 to $62,000 in a tax-favored retirement account sounds good to you, then look to see how SEP IRAs might help you reach your financial goals.
The $16,728 Social Security bonus most retirees completely overlook

Thanks to Kathleen Brock for this information!