Document

Federal Tax Update – December 2019

By David S. De Jong, Esq., CPA, Stein Sperling Bennett De Jong PC

INDIVIDUALS

The Taxpayer Certainty and Disaster Tax Relief Act of 2019, part of Public Law 116-94, the Further Consolidated Appropriations Act of 2020, extends through 2020:

●          The exclusion of up to $2 million on discharge of acquisition indebtedness on a principal residence.

●          The limited above-the-line deduction for higher education expenses of lower and middle income individuals.

●          The 7½ percent floor on the medical expense itemized deduction.

●          The deduction as interest of qualified mortgage insurance premiums (PMI) for lower and middle income individuals.

●          The 10 percent up to a $500 lifetime cap on qualified energy improvements to principal residences.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, part of Public Law 116-94, the Further Consolidated Appropriations Act of 2020:

●          Creates an exclusion from income in 2020 of up to $50 for each month of service for reductions or rebates in income taxes or property taxes given to volunteer emergency responders.

●          Expands Section 529 plans effective 2019 to allow utilization of funds for registered apprenticeships and for student loan repayments of principal and interest of up to $10,000 lifetime per beneficiary (with no deduction for interest allowable if paid from such a distribution).

●          Reverts the determination of the “kiddie tax” to pre-TCJA law with taxation of net unearned income generally at parents’ rate and eliminates the reduced AMT exemption for affected children effective 2020 but may optionally be applied for 2018 and 2019 returns.

In TOT Property Holdings, LLC v. Commissioner, Docket No. 5600-17, in a decision read from the bench, the Tax Court ruled that a donor cannot put an impermissible right in a deed of easement but save a charitable deduction for a conservation easement by using a “savings clause” that arises if a violation subsequently comes to light.

In Texas v. United States, 124 AFTR2d 2019-________, the Fifth Circuit Court of Appeals agreed with a Texas Federal District Court that the expiring individual mandate was unconstitutional, remanding to the lower court the issue as to whether the rest of the law stands up without the individual mandate.

In Letter Ruling 201950004, IRS ruled that the recipient of a donor egg could exclude amounts she received in a settlement for physical injury and emotional distress arising from giving birth to a child with a genetic condition causing multiple physical, cognitive and behavioral disabilities where neither the donor egg nor the embryo was properly tested.

RETIREMENT AND ESTATE PLANNING

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, part of Public Law 116-94, the Further Consolidated Appropriations Act of 2020:

●          Allows qualified retirement plans (like SEPs) to be created up to the extended due date of the tax return effective 2020 tax years.

●          Increases the employer credit effective 2020 tax years for starting a qualified retirement plan, SEP or SIMPLE IRA plan to the lesser of $250 multiplied by the number of non-highly compensated employees or $5,000 (with a $500 minimum credit) and creates an additional $1,500 credit over three years for new or existing 401(k) plans and SIMPLE IRAs which include automatic enrollment.

●          Ends continuing nondiscrimination testing for closed defined benefit plans retroactive to 2014 plan years.

●          Drops the requirement effective 2020 plan years that 401(k) plans which offer a 3 percent contribution to eligible employees provide an annual notice and extends the time period for offering such a “safe harbor” contribution for those who are eligible from the end of the 11th month of the applicable year to the last day of the succeeding year if made at 4 percent rather than 3 percent.

●          Requires a 401(k) plan effective 2021 plan years to allow an employee to make elective deferrals (even if not eligible to participate in employer contributions) following the entry date in which an employee age 21 or over has worked at least 500 hours in three consecutive years.

●          Treats plan loans accessed by credit cards as deemed distributions effective December 21, 2019.

●          Allows penalty-free withdrawals effective 2020 from employer plans or IRAs of up to $5,000 per parent for one year following the birth or adoption (except by a stepparent) of a child with recontribution available.

●          Allows the direct transfer within 90 days to another employer retirement pan or to an IRA effective 2020 plan years when a defined contribution plan, 403(b) plan or governmental plan no longer allows a particular guaranteed lifetime income investment to be held as an investment option.

●          Increases the required beginning date for mandatory distributions from age 70½ to age 72 effective 2020 with a continuing exception for non 5 percent owners in employer plans who continue to work.

●          Requires for deaths after 2019 (except in the case of annuity contracts existing on December 20, 2019) that defined contribution plans and IRAs distribute in full within ten years except as to eligible designated beneficiaries including spouses, disabled or chronically ill individuals, those with no more than a ten year age difference from the decedent and children under the age of majority (in the latter case distributions in full are required ten years from the date of majority).

●          Requires benefit statements for defined contribution plans beginning one year after IRS guidance to include a “lifetime income disclosure” at least once a year which would set forth the monthly payments that the individual would receive under both a straight life annuity and a joint and survivor annuity.

●          Allows consolidated Forms 5500 for single employer defined contribution plans with the same administrator, plan year, trustees and investment options effective 2022 plan years.

●          Increases retirement plan related penalties by tenfold including the penalty for failure to file Form 5500 which rises to $250 per day up to a maximum $150,000 effective for 2020 filings.

●          Allows taxable stipends and fellowships at the graduate or postdoctoral level to be treated as compensation for purpose of IRA contributions effective 2020.

●          Removes the prohibition at age 70½ on contributing to a traditional IRA effective 2020.

●          Requires the inclusion in income effective 2020 of otherwise taxable IRA distributions directed to a charity to the extent of “unrecaptured” donations made for tax years in or after the donor turned 70½.

BUSINESS

Public Law 116-94, the Further Consolidated Appropriations Act of 2020, repeals the “Cadillac Tax” on high cost employer-sponsored health benefits scheduled to take effect in 2022 and the medical device tax scheduled to take effect in 2020.

The Taxpayer Certainty and Disaster Tax Relief Act of 2019, part of Public Law 116-94, the Further Consolidated Appropriations Act of 2020, extends through 2020:

●          The tax benefits for businesses operating in “empowerment zones”.

●          The employer credit for paid family and medical leave of up to 12 weeks per year.

●          The work opportunity credit.

In Baker Hughes v. United States, 124 AFTR2d 2019-5466, the Fifth Circuit Court of Appeals agreed with a Texas Federal District Court that payment by an American parent to a Russian subsidiary as a “performance guarantee” to avoid liquidation was a capital contribution rather than a bad debt or business expense; the Court noted that this was a voluntary payment and not an enforceable obligation notwithstanding that the subsidiary would have been liquidated under Russian law for insufficient equity.

In Biegalski v. Commissioner, TC Summary Opinion 2019-35, the Tax Court found that a technology services provider could not prove 80 percent business use of her cell phone and permitted a deduction of only 50 percent.

In Messina v. Commissioner, 124 AFTR2d 2019-________, the Ninth Circuit Court of Appeals agreed with the Tax Court that an individual cannot get basis in his S corporation stock from amounts owed by the corporation to an entity in which the individual had an interest, questioning whether a taxpayer, as opposed to the IRS, can argue substance over form.

The IRS Manual was revised to state that IRS will not assume the QBID on a Substitute for Return in that an SFR cannot take into account the many limitations.

PROCEDURE

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, part of Public Law 116-94, the Further Consolidated Appropriations Act of 2020, increases the minimum failure to file penalty to the lesser of $400 or 100 percent of the tax due for returns with an extended due date after 2019.

In United States v. Martin, 124 AFTR2d 2019-6927, a Maryland Federal District Court enjoined a dentist and required him to deposit proper taxes, provide proof of deposits and timely file returns (the dentist got placed on two years of probation by the State Board of Dental Examiners after an IRS agent reported unsanitary conditions in his office).

In United States v. Agrawal, 124 AFTR2d 2019-6970, a Wisconsin Federal District Court found a taxpayer liable for willful failure to file FBAR forms as the affidavits he submitted were contrary to testimony he provided that he didn’t tell his accountants about the account.

In Garrett v. Commissioner, 124 AFTR2d 2019-________, the Third Circuit Court of Appeals agreed with the Tax Court that a petition was filed late, the appellate court holding that IRS was not required to resend the Notice of Deficiency when it learned of a change of address two days after the original Notice.

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