Time for a “Paycheck Checkup”
In IR-2019-97, the Service explained why these taxpayers should check their withholding amounts. Because 2018 was the first year for full implementation of the massive changes in the Tax Cuts and Jobs Act, many taxpayers overwithheld and received substantial refunds. Some taxpayers underwithheld and had to pay a large tax bill. A few of the taxpayers with large tax payments also paid penalties for underwithholding.
The Service stated, “The Tax Cuts and Jobs Act (TCJA) made changes to the tax law. Among other things, the new law increased the standard deduction, eliminated personal exemptions, increased the child tax credit, limited or discontinued certain deductions and changed the tax rates and brackets. As a result, many taxpayers ended up receiving refunds that were larger or smaller than expected, while others unexpectedly owed additional tax when they filed their 2018 tax returns.”
Making withholding changes early in the year is best. For taxpayers who adjust their withholding amounts now, any increase or decrease in withholding can be spread out over the next seven months and will not have as great of an impact as changes made late in the year.
The IRS urges taxpayers to use the Withholding Calculator on www.IRS.gov. You can estimate your income, credits, adjustments and deductions. This estimate will help you adjust your withholding to the right level. After using the Withholding Calculator, you must file a new IRS Form W-4 with your employer.
Self-employed workers may need to file and pay estimated tax payments. Form 1040-ES, available on www.IRS.gov, will help you determine the correct estimated tax amount.
Estimated tax payments are usually made electronically by fund transfers from a bank or financial services institution. The remaining estimated tax payment dates for this year are June 17 and September 16. A final estimated tax payment for this year is due on January 15, 2020. You can view tax payment options on www.IRS.gov/Payments.
House Passes SECURE Act
By a bipartisan vote of 417 to 3, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R. 1994) on May 24, 2019.
Both House Ways and Means Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) supported the bill. Brady noted, “Our bipartisan legislation makes it easier for main street businesses to offer retirement plans to their workers by easing administrative burdens, cutting down on unnecessary and often costly paperwork. In this bill, we also offer local businesses the flexibility to tailor retirement plans to best fit the needs of their workers, not to the needs of Washington.”
The SECURE Act now moves to the Senate. If it is passed by the Senate, it will be sent to the White House for signature by the President.
The bill includes many provisions designed to facilitate and enhance savings for retirement. While some provisions may change in the final bill, the sections below are generally supported and believed to be helpful to workers who desire to save for retirement.
- Traditional IRA Contributions — Individuals over age 70½ with earned income would be allowed to continue to make contributions each year.
- Required Minimum Distribution (RMD) Age — The current RMD age of 70½ would increase to age 72.
- Part Time Workers — Those individuals who work at least 500 hours per year for three years would be able to participate in qualified retirement plans.
- Retirement Plan Annuities — The rules would generally be expanded to permit more qualified retirement plans to offer annuity payout options.
- Retirement Benefit Disclosure — Plans would be encouraged to offer an expanded disclosure of future retirement benefits to participants.
- Stretch Distribution Reduced — Inherited IRAs for most beneficiaries would no longer be distributed over life expectancy, but instead would be required to be paid out over a term of 10 years.
Editor’s Note: The Senate has introduced the Retirement Enhancement and Savings Act of 2019. The bill was cosponsored by Senate Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR). The Senate bill also has strong bipartisan support. With support for retirement law reform in both the House and Senate, passage of major legislation this year now seems quite likely.
SALT Charitable Deduction Regulations Promised “Soon”
On May 23, Treasury Secretary Steven Mnuchin appeared at a hearing of the House Financial Services Committee. When Mnuchin was asked about the date for publishing the final regulations on state and local tax (SALT) limits on charitable deductions, Mnuchin said they will be “out shortly.”
Many representatives from New York, New Jersey and other high-tax states strongly opposed the Tax Cuts and Jobs Act $10,000 cap on SALT deductions. In addition, the August 2018 proposed regulations are designed to block SALT-related charitable credits. These representatives accused Mnuchin of targeting high-tax states in the proposed regulations.
Under REG-112176-18, a state tax charitable gift credit over 15% is a “quid pro quo.” The state credit over 15% will reduce the value of a federal charitable gift deduction. These proposed regulations effectively eliminate state efforts to restore the SALT deduction through a state charitable fund and tax credit.
Representative Josh Gottheimer (D-NJ) claimed that his district was unfairly targeted. Over 42% of the taxpayers in his district claim the SALT deduction. For these taxpayers, the $10,000 SALT cap and the proposed regulations greatly reduced their 2018 deductions.
Secretary Mnuchin responded, “We are trying to make sure that the legitimate use of tax credits is still allowed.”
Editor’s Note: Treasury Assistant Secretary for Tax Policy David Kautter predicted the final SALT regulations on charitable tax credits will be published in June. The history of final regulations is that they generally are similar to the proposed regulations.
Applicable Federal Rate of 2.8% for June — Rev. Rul. 2019-14; 2019-23 IRB 1 (16 May 2018)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2019. The AFR under Section 7520 for the month of June is 2.8%. The rates for May of 2.8% or April of 3.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.