Highlights of the Retirement Savings Act
The House passed the Retirement Savings, and Other Tax Relief Act of 2018 as part of a package sent to the Senate in order to avoid a government shutdown. This relief act would provide certain “extenders,” provide technical changes to the Tax Cuts and Jobs Act (TCJA) of 2017, increase access and provide a better way to save for retirement, and miscellaneous other provisions.
The bill would extend a number of tax provisions that expired at the end of 2017. This list of provisions, commonly known as “extenders,” includes provisions related to alternative fuels, private mortgage insurance and the depreciation of race horses and NASCAR facilities. The provision related to biodiesel would be extended until 2021, and then phased out by 2025.
The bill includes several “technical corrections” to the TCJA of 2017. It would clarify that qualified improvement property (QIP) can be immediately deducted and clarifies an issue with the treatment of net operating losses (NOL).
The bill includes several changes to the administration of retirement accounts, particularly as they relate to small employers. Additionally, individuals would now be able to withdraw up to $7,500, without penalty, from retirement accounts for the birth or adoption of a child. It would also allow individuals to contribute to traditional Individual Retirement Accounts (IRAs) past the age of 70½.
The bill would include a provision allowing start-up businesses to deduct up to $20,000 in start-up expenses. This provision was previously included in the Tax Reform 2.0 package released earlier this year. It also provides disaster relief assistance to individuals impacted by natural disasters in 2018, including Hurricanes Florence and Michael, western wildfires and weather events in Hawaii.
The TCJA provided a special provision allowing 100 percent bonus depreciation for certain property. Before the TCJA, anyone that made improvements to their property as QIP, could use bonus depreciation of 50 percent, of the cost of the property. However, due to a congressional oversight, this provision was excluded from the TCJA. This act would change this oversight and allow special bonus depreciation of QIP.
For retirement accounts, under the current system the lion share of retirement savings are subject to just one layer of taxation. However, these retirement accounts are configured with differing rules and restrictions, often confusing not only taxpayers, but some professionals.
This current bill is basically designed to encourage small businesses to adopt retirement plans. A lot of small businesses today find that adopting a retirement for their employees can be cost prohibitive. The bill would provide access to Multiple Employer Plans (MEP), which could save the small business money on administrative costs of a retirement plan, by “pooling” together other small businesses to share in cost of the plan.
The act would also expand the credit for small business retirement plan start up costs. It would create a credit for companies that use an auto-enroll feature that will be embedded in these plans.
A tax neutral retirement account, such as a Roth, is currently only allowed for certain taxpayers. The act would expand the access to these accounts, by creating Universal Savings Accounts, which would allow taxpayers to put after tax contributions into these accounts. These savings accounts would not have the same rules as other retirement vehicles, and would allow for withdrawals that would be both tax and penalty free.
Currently, a business can deduct up to $5,000 of start-up expenses, amortizing any remaining start-up expenses over a period of 15 years. The act would allow for a deduction of $20,000 of start-up expenses.
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Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...