Thought Leadership


How the SECURE Act & Cryptocurrency Regulations Affect Pitcairn Clients

By Matthew R. Hilbert, CPA - Director of Tax

 

Key Takeaways of the SECURE Act

March 13, 2020 - On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law. As we shared in our January article, “New Spending Package Includes Sweeping Retirement Plan Changes,” the SECURE Act represents the most sweeping set of changes to retirement legislation in more than a decade. Most provisions in the law became effective on or after January 1, 2020.

While many of the policy changes increase opportunities for individuals and small business owners, there are significant changes that have the potential to impact Pitcairn clients. Here are specific provisions that may impact you and your planning:

Required Minimum Distributions (RMD)

The SECURE Act includes two significant changes to rules around RMDs:

  1. The Act repeals the maximum age to make deductible contributions to a traditional IRA by taxpayers who are at least 70 ½. Note that contributions made will reduce the $100,000 limit for Qualified Charitable Distributions that apply to your RMD.
  2. The Act increases the age for RMDs to age 72 effective for individuals who are 70 ½ on or after January 1, 2020. Note that if RMDs were required for an individual who was 70 ½ in 2019, RMDs must continue under pre-existing rules.

Expansion of Section 529 Plans

The Act now allows tax-free distributions from a 529 plan for a registered apprenticeship program and for qualified education loan repayments of up to $10,000.

Modification of RMD rules for inherited IRAs and Defined Contribution Plans

The new law requires the entire interest in an IRA or defined contribution plan to be distributed to a designated beneficiary within 10 years after the death of the owner. This limits the benefits of so-called “Stretch IRAs,” which were designed to maximize the length of time that benefits can be deferred tax-free by naming younger generation beneficiaries. This planning tool was particularly attractive to UHNW individuals, as retirement accounts are often an accumulation of assets in excess of living needs.

Clients may want to revisit their planning around traditional IRAs with a focus on a few key areas:

  •  Owners may want to consider converting to a Roth IRA. This structure allows beneficiaries to inherit the accounts without the burden of income taxes, which when paid are removed from the taxable estate of the IRA holder.
  • Owners may choose to name a charity as beneficiary, which would result in no taxes due upon distribution.
  • Beneficiaries may use the accelerated distributions to make or increase tax-deferred contributions of their own to re-start the deferral period.

Note that distributions under the new rules are not required to be made at any point prior to the end of the 10th calendar year after the year of the owner’s death. At that point, the entire balance must be distributed. Beneficiaries should consider the impact of marginal tax rates during the 10 year period in determining whether to take distributions or continue to defer until year 10.

Modification of Rules Relating to the Taxation of Unearned Income of Certain Children (“Kiddie Tax”)

The Act strikes the Tax Cuts and Jobs Act of 2017 (TCJA) amendment that computed the tax using the compressed tax rates applicable to trusts and restores the computation of tax using the parents’ marginal tax rates. This new law applies to taxable years beginning after December 31, 2019 (2020 tax returns). Taxpayers can elect to apply the old rules for both 2018 and 2019, which may result in amendments of previously filed 2018 income tax returns. Your tax advisor should consider the election for 2019 and possible amended 2018 filing.

 

Cryptocurrencies (Virtual Currencies) – Enforcement Efforts

Much like Congress’s enactment of the Foreign Account Tax Compliance Act (FACTA) in 2010 to enforce compliance with offshore funds, the IRS and Congress are ramping up efforts to ensure compliance with the tax rules regarding cryptocurrency. On July 26, 2019, the IRS issued a news release titled, “Reporting Virtual Currency Transactions,” following a 2018 campaign to better understand virtual currencies and enforce individual compliance. The news release contained three sample letters that the IRS would be mailing to selected taxpayers based upon their belief or knowledge that the taxpayers have engaged in such activity. 

The opening sentence to the IRS letters indicates that the IRS means business:

We have information that you have or had one or more accounts containing virtual currency and may not have met your US tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.

In a follow-up to Notice 2014-21, which provided minimal guidance to the treatment of virtual currency transactions, on October 9, 2019, the IRS issued Revenue Ruling 2019-24 and an additional set of FAQs with more detailed guidance. The latest effort to capture information on virtual currency transactions and holdings is reflected in this question added to Schedule 1 of Form 1040 for 2019. 

 

Since the IRS treats virtual currency as property for income tax purposes, practically every use, sale, or exchange results in a capital gain (or loss) transaction reportable on schedule D of form 1040. The first step in this process will be to provide an answer to the probing question included on this year’s income tax return.

Here are additional resources and links:

  • Sample IRS letter: https://www.irs.gov/pub/notices/letter_6173.pdf
  • IRS Notice 2014-21: https://www.irs.gov/pub/irs-drop/n-14-21.pdf
  • IRS Frequently asked questions document: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

As the treatment of virtual currencies is very complex, we recommend that you consult with your tax advisor on your reporting requirements.

Monitoring for Future Developments

As always, the team at Pitcairn continues to monitor for new developments in these evolving regulations and is staying ahead of new and proposed legislation. Our goal is to serve as a trusted partner to clients in providing knowledge, resources, and strategic guidance to ensure families are making the sound decisions that deliver the best outcomes today and for generations to come. 

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Our Latest News


How the SECURE Act & Cryptocurrency Regulations Affect Pitcairn Clients

By Matthew R. Hilbert, CPA - Director of Tax

 

Key Takeaways of the SECURE Act

March 13, 2020 - On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law. As we shared in our January article, “New Spending Package Includes Sweeping Retirement Plan Changes,” the SECURE Act represents the most sweeping set of changes to retirement legislation in more than a decade. Most provisions in the law became effective on or after January 1, 2020.

While many of the policy changes increase opportunities for individuals and small business owners, there are significant changes that have the potential to impact Pitcairn clients. Here are specific provisions that may impact you and your planning:

Required Minimum Distributions (RMD)

The SECURE Act includes two significant changes to rules around RMDs:

  1. The Act repeals the maximum age to make deductible contributions to a traditional IRA by taxpayers who are at least 70 ½. Note that contributions made will reduce the $100,000 limit for Qualified Charitable Distributions that apply to your RMD.
  2. The Act increases the age for RMDs to age 72 effective for individuals who are 70 ½ on or after January 1, 2020. Note that if RMDs were required for an individual who was 70 ½ in 2019, RMDs must continue under pre-existing rules.

Expansion of Section 529 Plans

The Act now allows tax-free distributions from a 529 plan for a registered apprenticeship program and for qualified education loan repayments of up to $10,000.

Modification of RMD rules for inherited IRAs and Defined Contribution Plans

The new law requires the entire interest in an IRA or defined contribution plan to be distributed to a designated beneficiary within 10 years after the death of the owner. This limits the benefits of so-called “Stretch IRAs,” which were designed to maximize the length of time that benefits can be deferred tax-free by naming younger generation beneficiaries. This planning tool was particularly attractive to UHNW individuals, as retirement accounts are often an accumulation of assets in excess of living needs.

Clients may want to revisit their planning around traditional IRAs with a focus on a few key areas:

  •  Owners may want to consider converting to a Roth IRA. This structure allows beneficiaries to inherit the accounts without the burden of income taxes, which when paid are removed from the taxable estate of the IRA holder.
  • Owners may choose to name a charity as beneficiary, which would result in no taxes due upon distribution.
  • Beneficiaries may use the accelerated distributions to make or increase tax-deferred contributions of their own to re-start the deferral period.

Note that distributions under the new rules are not required to be made at any point prior to the end of the 10th calendar year after the year of the owner’s death. At that point, the entire balance must be distributed. Beneficiaries should consider the impact of marginal tax rates during the 10 year period in determining whether to take distributions or continue to defer until year 10.

Modification of Rules Relating to the Taxation of Unearned Income of Certain Children (“Kiddie Tax”)

The Act strikes the Tax Cuts and Jobs Act of 2017 (TCJA) amendment that computed the tax using the compressed tax rates applicable to trusts and restores the computation of tax using the parents’ marginal tax rates. This new law applies to taxable years beginning after December 31, 2019 (2020 tax returns). Taxpayers can elect to apply the old rules for both 2018 and 2019, which may result in amendments of previously filed 2018 income tax returns. Your tax advisor should consider the election for 2019 and possible amended 2018 filing.

 

Cryptocurrencies (Virtual Currencies) – Enforcement Efforts

Much like Congress’s enactment of the Foreign Account Tax Compliance Act (FACTA) in 2010 to enforce compliance with offshore funds, the IRS and Congress are ramping up efforts to ensure compliance with the tax rules regarding cryptocurrency. On July 26, 2019, the IRS issued a news release titled, “Reporting Virtual Currency Transactions,” following a 2018 campaign to better understand virtual currencies and enforce individual compliance. The news release contained three sample letters that the IRS would be mailing to selected taxpayers based upon their belief or knowledge that the taxpayers have engaged in such activity. 

The opening sentence to the IRS letters indicates that the IRS means business:

We have information that you have or had one or more accounts containing virtual currency and may not have met your US tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.

In a follow-up to Notice 2014-21, which provided minimal guidance to the treatment of virtual currency transactions, on October 9, 2019, the IRS issued Revenue Ruling 2019-24 and an additional set of FAQs with more detailed guidance. The latest effort to capture information on virtual currency transactions and holdings is reflected in this question added to Schedule 1 of Form 1040 for 2019. 

 

Since the IRS treats virtual currency as property for income tax purposes, practically every use, sale, or exchange results in a capital gain (or loss) transaction reportable on schedule D of form 1040. The first step in this process will be to provide an answer to the probing question included on this year’s income tax return.

Here are additional resources and links:

  • Sample IRS letter: https://www.irs.gov/pub/notices/letter_6173.pdf
  • IRS Notice 2014-21: https://www.irs.gov/pub/irs-drop/n-14-21.pdf
  • IRS Frequently asked questions document: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

As the treatment of virtual currencies is very complex, we recommend that you consult with your tax advisor on your reporting requirements.

Monitoring for Future Developments

As always, the team at Pitcairn continues to monitor for new developments in these evolving regulations and is staying ahead of new and proposed legislation. Our goal is to serve as a trusted partner to clients in providing knowledge, resources, and strategic guidance to ensure families are making the sound decisions that deliver the best outcomes today and for generations to come. 

Share