6 Other Year-End Tax Law Changes to Be Aware Of

1. New Types of Payments Deemed Compensation for IRA Contribution Purposes.

Prior law allowed a person to contribute the lesser of (1) a dollar amount or (2) the individual’s compensation included in gross income, to an IRA. Under the Secure Act, graduate and postdoc students can consider fellowship stipends and similar payments to make them eligible to contribute to an IRA.

2. No Age Cap on Traditional IRA Contributions.

Prior law required a beneficiary to be under age 70 ½ to contribute to an IRA. Under the new law, there is no age limit cap. You can be over age 70 ½ and make deductible contributions to an IRA, if you have earned income.

3. Exemption from Early Withdrawal Penalty for Adoption Expenses.

New law creates an exception to the 10% early withdrawal tax for qualified birth or adoption distributions from an eligible retirement plan. Already exempted are:

  1. Qualified higher education expenses for you, spouse, children or grandchildren.
  2. Using up to $10K to buy, build or rebuild a first home.
  3. Unreimbursed medical expenses exceed 7.5% of AGI.
  4. You are in the military and call for active duty for more than 179 days.
  5. You are totally and permanently disabled; and
  6. You are beneficiary of a deceased IRA owner.

4. Types of Section 529 Plan Expenses Expanded.

The Secure Act expands tax-free treatment for higher education expenses for purposes of a Section 529 plan to include: (1) a registered apprenticeship program’s required fees, books, supplies and equipment and (2) qualified education loan repayments of up to $10,000, effective for distributions after 12/31/18.

5. Increase in Penalty for Failure to File an Income Tax Return.

If an income tax return is filed more than 60 days late, the prior law provided that the penalty couldn’t be less than $205 (adjusted for inflation) or the tax required to be shown on the return – whichever was less. Penalties can be waived if the failure is due to reasonable cause and not willful neglect. For returns filed after 2019, the statutory penalty cannot be less than $330, which will also be adjusted for inflation.

6. Kiddie Tax Changes.

The so-called “kiddie tax” requires children pay tax on unearned income at their parents’ rate. The Tax Cuts and Jobs Act (TCJA) modified the tax to apply ordinary and capital gains rates (applicable to trusts and estates) to the net unearned income of a child. The new law eliminates the TCJA amendment.

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