There have been some notable updates on tax legislation recently and we wanted to provide a quick overview here:
SECURE Act Proposed Regulations - On February 23, 2022, the IRS issued proposed regulations to reflect the changes to the Internal Revenue Code made by the SECURE Act. The SECURE Act was signed into law back in December 2019 and I wrote about the changes it contained here. The most significant of those changes was the new 10-year rule for inherited IRAs.
Prior to passage of the SECURE Act, most non-spouse beneficiaries of a retirement account were eligible to “stretch” the distributions from that IRA account over their life expectancy. That means most beneficiaries had to take a required minimum distribution from the account each year for the rest of their lives. The SECURE Act introduced the 10-year rule, which said that most non-spouse beneficiaries would now be required to distribute the entire account within 10 years.
At the time, it was widely believed that this meant the end of annual required minimum distributions for non-spouse beneficiaries. Then, in early 2021, the IRS included an example in their annual update to their IRA publication that seemed to indicate annual RMDs would be required in addition to the new 10-year rule. This caused a lot of confusion among the retirement planning community, and the IRS came out and indicated this was a mistake and corrected that publication in May 2021.
In a surprise twist, the recently proposed regulations again say that most non-spouse beneficiaries will be required to take annual distributions AND liquidate the entire account within 10 years. Specifically, this would apply to non-spouse beneficiaries who inherit a retirement account from an owner who died on or after they were required to start taking their own annual distributions. If the original owner had not reached their required distribution age yet, ONLY the 10 year rule will apply. There are exceptions to these rules for “eligible designated beneficiaries” that include minor children and disabled persons, among others.
There is a lot more included in the proposed regulations, but this change will likely impact the most people. These regulations are not final yet and we expect the IRS to receive a large volume of complaints about the change during their comment period. This guidance could change before final regulations are issued and we’ll be watching this closely.
SECURE Act 2.0 Passes the House
While we are still waiting for final regulations on the original SECURE Act, another retirement bill, being dubbed the SECURE Act 2.0 is back on the minds of Congress. I first told you about this bill back in July of last year, but there was no further action on the bill until this March, when the House unanimously passed their version of the bill in a 414-5 vote.
The Senate has their own version of the bill, and while there are some differences between the two, there are also many similarities. There seems to be bipartisan support for something to get passed so most experts anticipate we’ll see something happen before the end of the year. Stay tuned…
Maryland Retirement Tax Elimination Act
A few weeks ago Maryland Governor Larry Hogan signed into law a significant tax cut package that included the Retirement Tax Elimination Act. This bill will create a nonrefundable credit against state income tax for residents who are at least age 65 and whose Federal Adjusted Gross Income (AGI) does not exceed $100,000, or $150,000 if filing jointly. The credit amounts are as follows:
- $1,000 for individual filers or for a couple where only one person is eligible (over 65)
- $1,750 for married filing jointly taxpayers where both individuals are at least 65
This bill takes effect for tax year 2022 and beyond but it can be reduced in the future for certain taxpayers if state revenues fall below certain thresholds.
-Chris Benson, CPA, PFS
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