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Modification of Required
Minimum Distribution Rules
After Death
In general, owners of tax-favored
employer-sponsored retirement
plans and IRAs must take distributions over their life or life
expectancy (RMDs). If the plan
participant or IRA owner dies before
2020, spousal and non-spousal beneficiaries are allowed to stretch out
the required distributions over the
beneficiary's life or life expectancy.
For deaths of plan participants
or IRA owners beginning in 2020,
distributions to most non-spouse
beneficiaries need to be distributed within 10 years after the plan
participant or IRA owner's death.
Exceptions to the 10-year rule for
distributions include the following:
* A sur viving spouse of the plan
participant or IRA owner.
* A child of the plan participant or IRA
owner who hasn't reached majority.
* A chronically ill individual.
* Another person who isn't more than
10 years younger than the plan
participant or IRA owner.
For individuals who fall under
one of the exceptions, they will
continue to take distributions over
their life or life expectancy.

Repeal of Maximum Age for
Traditional IRA Contributions
For contributions made for tax years
beginning after 2019, the SECURE
Act allows individuals of any age to
make contributions to a traditional
IRA, assuming there is enough
compensation. Prior to this rule
change, taxpayers were not allowed
to make an IRA contribution once
they reached age 70½ by the close
of the year. The restriction doesn't
apply to Roth IRA contributions.
* Rationale: Americans are living
longer and many are continuing to
work past 70½ years old.
For qualified charitable distributions (QCD) made after 2019, the
taxpayer's QCD is reduced by the

excess of: 1) the total amount of IRA
deductions allowed after reaching
age 70½ over 2) the aggregate
amount of reductions in prior years.

Penalty-free Retirement Plan
Withdrawals for Births and
Adoptions
Beginning in 2020, taxpayers can
take up to $5,000 (for each spouse)
of penalty-free retirement plan
distributions for expenses related
to the birth or adoption of a child.
In general, retirement plan distributions are included in income, and
unless an exception applies, distributions before the recipient turns
59½ years old are subject to a 10
percent early withdrawal penalty.

Long-term/Part-time Workers
Allowed to Participate in 401(k)
Plans
Under current law, employers
are allowed to exclude part-time
employees who work less than 1,000
hours per year from participating in
defined contribution plans. Under
the new law, and for plan years
beginning after Dec. 31, 2020,
employers must allow employees
working at least 500 hours per year
for at least three consecutive years
to make elective deferrals.
* Rationale: Women are more likely to
work part-time and can be excluded
from participating in retirement
plans.

Taxable, Non-tuition Fellowship
and Stipend Payments Treated
as Compensation for IRAs
Beginning in 2020, graduate and
post-doctoral students who receive
taxable, non-tuition fellowship and
stipend payments are allowed to
treat the payments as compensation for IRA contribution purposes.
IRA contributions cannot exceed a
taxpayer's compensation included
in gross income.

Increased Credit Limit for Small
Employer Pension Plan Start-up
Costs
Small business owners are allowed
to take a tax credit for establishing a
qualified retirement plan, such as a
SIMPLE IRA or SEP plan. The credit
is the lesser of $500 or 50 percent of
the start-up costs.
For tax years beginning after
Dec. 31, 2019, the SECURE Act
increases the credit to the greater
of $500 or the lesser of $250 multiplied by the number of non-highly
compensated individuals eligible to
participate or $5,000.
* Rationale: The increased credit
makes it more affordable for small
businesses to establish a retirement
plan.

Small Employer Automatic
Enrollment Credit
For tax years beginning after Dec.
31, 2019, the SECURE Act establishes
a $500 tax credit for employers who
set up a new 401(k) plan or SIMPLE
IRA plan with an automatic enrollment feature. The credit helps
offset plan start-up costs and is
in addition to the already existing
pension plan start-up credit. You
also qualify for the credit if you
convert an existing plan to one with
automatic enrollment.
* Rationale: Retirement plans with
automatic enrollment have proven
to increase participation, leading to
more retirement savings.

Expansion of Section 529 Plans
(qualified tuition programs)
For distributions made after Dec.
31, 2018, qualified higher education expenses under Section 529,
which allows for tax-free treatment,
now include costs associated with
registered apprenticeships, and up
to $10,000 of qualified student loan
repayments (principal and interest).

(TCJA), the net unearned income
of a child (under 19 years old or a
full-time student under 24 years
old) was taxed at the parent's tax
rates, if the parent's rates were
higher than the child's rates. For
tax years beginning after 2017,
the TCJA changed the rule so that
the unearned income of the child
would be taxed at trust and estate
tax rates.
The SECURE Act repeals the
kiddie tax rules that were added by
TCJA, effective for tax years beginning after Dec. 31, 2019. You may
elect to apply the pre-TCJA rules in
2018 and 2019. By the way, a child's
earned income is taxed at single
rates and this has not changed.
* R at ionale: The TCJA changes
unfairly increased the tax on certain
children.

Failure to File Penalty Increased
For tax returns with due dates after
Dec. 31, 2019, the failure to file penalty is increased to the lesser of $435
or 100 percent of the tax due (from
the lesser of $205 or 100 percent of
the tax due). The penalty applies
when a return is more than 60 days
late and the taxpayer cannot show
reasonable cause for the late filing.
If the failure to file penalty and
the failure to pay the tax penalty
both apply in the same month, the
failure to file penalty is reduced by
the failure to pay penalty.
* Rationale: The penalty encourages
timely and accurate returns being
filed.

EDUCATE YOUR CLIENTS
Tax professionals can take
advantage of this new legislation
as another way to educate their
clients and buttress their role as a
trusted advisor through retirement
planning. ■
Mike D'Avolio, J.D., CPA, is a
senior tax analyst with Intuit.

Kiddie Tax Changes
Prior to the Tax Cuts and Jobs Act

MARCH 2020 ■

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