Year-end government spending bill contains many tax provisions

The federal government spending bill passed by Congress in December repealed three health care taxes that were originally enacted as part of 2010 health care reform legislation, made many changes to retirement plan rules, extended a number of expired tax provisions, provided disaster tax relief, and repealed the provision that taxed exempt organizations when they provided parking to their employees. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, was signed into law by President Donald Trump on Dec. 20, 2019.

Health care taxes

The three repealed health care taxes are the Sec. 4980I excise tax on certain high-cost employer health plans, popularly called the Cadillac tax; the Sec. 4191 medical device excise tax; and the annual fee on health insurance providers contained in Section 9010 of the Patient Protection and Affordable Care Act, P.L. 111-148.

All three taxes had previously been postponed or suspended, most recently by P.L. 115-120 (a fiscal-year 2018 federal appropriations continuing resolution). The Sec. 4980I Cadillac tax had been delayed until 2022. The 2.3% medical device excise tax had been suspended through Dec. 31, 2019, and the health insurance fee had been suspended for 2019.

The three taxes had been enacted to fund the health care reform known as Obamacare.

Retirement plan changes

The act also incorporates the text of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which passed the House of Representatives in May.

The SECURE Act is designed to encourage retirement savings in various ways and to simplify administrative requirements to make it easier for employers to offer retirement plans.

Among many other changes, the act:

• Increases the age after which required minimum distributions from certain retirement accounts must begin, to 72 (from 70½);
• Modifies requirements for multiple-employer plans to make it easier for small businesses to offer such plans to their employees, by allowing otherwise unrelated employers to join in the same plan;
• Reduces Pension Benefit Guaranty Corp. premiums for certain multiple-employer defined benefit plans of cooperatives and charities;
• Allows penalty-free distributions from qualified retirement plans and IRAs for births and adoptions;
• Makes it easier for long-term, part-time employees to participate in elective deferrals;
• Allows consolidated filings of Forms 5500, Annual Return/Report of Employee Benefit Plan, for similar plans;
• Allows certain home health care workers to contribute to a defined contribution plan or IRA; and
• Requires beneficiaries of IRAs and qualified plans (other than certain designated beneficiaries including surviving spouses) to withdraw all money from inherited accounts within 10 years.

The act repeals the maximum age for IRA contributions (currently 70½). It also amends Sec. 408(d)(8) to reduce the amount of qualified charitable IRA distributions excluded from taxpayers’ gross income by the aggregate IRA contribution deductions allowed to them after they turn 70½.

The act allows certain expenses associated with registered apprenticeship programs to count as qualified higher education expenses for purposes of Sec. 529.

The Sec. 6651(d)(3) failure-to-file minimum penalty is increased to $435.

The kiddie tax rates based on those of trusts and estates in Sec. 1(j)(4), which were introduced by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, are repealed, making the previous regime of allocable parental tax under Sec. 1(g) once again applicable. This change is generally effective for tax years beginning after Dec. 31, 2019, but taxpayers may elect to have it apply to earlier years.

Extenders

The Further Consolidated Appropriations Act also extends many expired tax provisions. Among those extended through 2020 are:

• Sec. 108(a)(1)(E), which excludes from gross income the discharge of qualified principal residence indebtedness income.
• The Sec. 163(h)(3)(E) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose adjusted gross income (AGI) is within or below a phaseout range to deduct part or all of the cost of premiums paid or accrued on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s qualified residence.
• The 7.5% (instead of 10%) of AGI floor for medical expense deductions in Sec. 213(f).
• Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.

Also extended were various incentives for employment and economic growth and for energy production and efficiency.

A number of credits that were scheduled to expire at the end of 2019 were extended through 2020. These include the Sec. 45D new markets tax credit, the Sec. 45S employer credit for paid family and medical leave, the Sec. 51 work opportunity credit, and the Sec. 35 credit for health insurance costs of eligible individuals.

Disaster tax relief

The act also provides tax relief for victims of various disasters occurring in 2018, 2019, and up to 30 days after enactment (Jan. 19, 2020). Eligible taxpayers can make tax-favored withdrawals from retirement plans. The act also provides an employee retention credit for eligible employers equal to 40% of qualified wages, which are wages paid to an employee during the time the employer’s business is not operating due to a natural disaster (up to 150 days after the disaster).

The act also implements special rules for disaster-related personal casualty losses and for determining earned income for purposes of the Sec. 32 earned income tax credit. The act also introduces automatic 60-day filing extensions for certain taxpayers affected by federally declared disasters.

Parking as UBTI

Finally, the act repeals Sec. 512(a)(7), which was enacted by the TCJA and required tax-exempt employers that provide qualified transportation fringe benefits or parking to employees to pay unrelated business income tax on the amount by which a deduction is not allowable under Sec. 274.

• Further Consolidated Appropriations Act, 2020, Divisions N (Health and Human Services Extenders), O(SECURE Act of 2019), and Q (Taxpayer Certainty and Disaster Tax Relief Act of 2019), P.L. 116-94.

— By Alistair M. Nevius, J.D., the JofA‘s editor-in-chief, tax.