Year-end government spending bill contains many tax provisions

By Alistair M. Nevius, J.D.

The federal government spending bill passed by Congress on Thursday repeals three health care taxes that were originally enacted as part of 2010 health care reform legislation, makes many changes to retirement plan rules, extends several expired tax provisions, provides disaster tax relief, and repeals the provision that taxed exempt organizations when they provided parking to their employees. The Further Consolidated Appropriations Act, 2020, H.R. 1865, passed the House of Representatives on Tuesday by a vote of 297–120 and the Senate on Thursday by a vote of 71–23. It now goes to President Donald Trump for his signature.

[Update: The president signed the bill into law on Friday, 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The three repealed health care taxes are the Sec. 4980I excise tax on certain high-cost employer health plans, popularly called the Cadillac tax; the Sec. 4191 medical device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 was suspended through Dec. 31, 2019. And the health insurance fee was suspended for 2019.

The three taxes, which were enacted to fund the health care reform known as Obamacare, have now been repealed.

Retirement plan changes

The bill 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 but was never voted on by the Senate.

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

The bill introduces many other changes. Among them, the bill:

  • 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 completely unrelated employers to join in the same plan;
  • Reduces Pension Benefit Guaranty Corporation 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 to withdraw all money from inherited accounts within 10 years.

The bill repeals the maximum age for IRA contributions (currently 70½). It also amends Sec. 408 to reduce the amount of deductible charitable IRA contributions allowed to taxpayers over 70½ by the aggregate IRA contribution deductions allowed to them after they turn 70½.

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

The Sec. 6651 failure-to-file penalty is increased to $435.

The new kiddie tax in Sec. 1(j)(4), which was introduced by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, is repealed.

Extenders

The bill 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) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s principal residence;
  • The 7.5% (instead of 10%) adjusted-gross-income floor for medical expense deductions in Sec. 213(f); and
  • 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 bill also provides tax relief for victims of various disasters occurring in 2018, 2019, and up to 30 days after enactment of the bill. Eligible taxpayers can make tax-favored withdrawals from retirement plans. The bill also enacts 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 bill 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 bill also introduces automatic 60-day filing extensions for certain taxpayers affected by federally declared disasters.

Parking as UBTI

Finally, the bill repeals Sec. 512(a)(7), which was enacted by the TCJA and which 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.

— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

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