Tax Extenders in the Further Consolidated Appropriations Act 2020
If the Term “Tax Extenders” is New to You, Read On…
At a time when politicians can’t seem to agree on much, in late December the House and the Senate passed and sent a bill to the White House, the Further Consolidated Appropriations Act 2020. It was signed into law just before the new year. The bill included a wide range of extenders (many retroactive to the 2018 tax year). In addition to those, the SECURE Act, also signed by the President, makes great changes to a variety of retirement-related provisions that will impact individual taxpayers and their employers. Here are some highlights you might find helpful.
First, What is a Tax Extender?
Temporary tax provisions enacted by Congress, are made temporary so they must be reviewed. This happens when they are scheduled to expire, or “sunset”. Think of the twenty-three tax provisions benefitting individuals in the Tax Cuts and Jobs Act, 2017, that will sunset in 2025. These also are known as expiring provisions. There are several dozen temporary tax cuts that expired at the end of 2017 and some that expired at the end of 2018. Most reward consumer and business investments in energy efficiency and production, as well as use of alternative fuels. The largest individual extender excludes mortgage forgiveness from income. Collectively, these provisions are known as the “tax extenders” because lawmakers often, as they did in this Further Consolidated Appropriations Act 2020, extend many of them.
Retroactive reinstatement for the mortgage insurance premium (PMI) deduction and it is extended through 2020.
- This deduction can once again be included on your Schedule A when you include premiums paid for mortgage insurance for your residence and even a vacation home. According to the law, mortgage premiums for insurance can be included with deductible mortgage interest on Schedule A.
Retroactive reinstatement for the exclusion of qualified mortgage debt and it is extended through 2020.
- This is an extension of the Mortgage Debt Relief Act. This Act, when passed, covered a 3-year period from 2007 to 2010, in response to the mortgage crisis. Five extensions have been granted (2012, 2013, 2014, 2016, 2017). Now, this can also apply to debt that is discharged in 2019 and 2020 provided that there was a written agreement entered into in 2019.
Retroactive reinstatement for the above-the-line qualified tuition and related expenses deduction and is extended through 2020.
- Pre-Tax Cut Jobs Act, the deduction allowed taxpayers to claim an above the line deduction for qualifying expenses – without the need to itemize. It has been extended through 2020. That means taxpayers with AGI that doesn’t exceed $65,000 ($130K in the case of married taxpayers filing joint returns) are entitled to a maximum higher education tax deduction of $4,000. If your AGI does not exceed $80,000 ($160K married filing jointly) you are entitled to a maximum deduction of $2,000. Taxpayers with AGI above these thresholds are not entitled to the tuition deduction. This deduction is not allowed if the American Opportunity Tax Credit produces a lower tax.
Retroactive reinstatement for the construction of energy efficient homes and is extended through 2020.
- A taxpayer, for non-business purposes, may take a credit against their tax liability for the taxable year in an amount equal to the sum of 10% of the amount paid or incurred for qualified energy efficiency upgrades/improvements installed during the taxable year, along with the cost of the residential energy property expenses incurred during the taxable year. The nonbusiness energy property credit expired Dec. 31, 2017. The expiration is now Dec. 31, 2020.
The medical expenses deduction returns to 7.5% for 2019 and 2020.
- This one is simple. For taxable years ending before Jan. 1, 2021, the threshold for deducting medical expenses is 7.5% for all taxpayers. It used to be 10%. This threshold applies for the purposes of Alternative Minimum Tax (AMT) in addition to regular tax. In 2021, the AGI threshold increases to 10%.
The employer credit for paid family and medical leave and the work opportunity credit has been reinstated for 2020.
- This leave credit is a general business credit employers may claim, based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions. Employers must have a written policy in place that meets certain requirements, including providing:
- At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part time), and;
- The paid leave is not less than 50 percent of the wages normally paid to the employee.
- Employers file Form 5884 to claim the work opportunity credit for qualified first- and/or second-year wages they paid, during the tax year, to or incurred for targeted group employees who have consistently faced significant barriers to employment.
Retirement Plans Are Also Affected
Most inherited retirement accounts are required to be distributed within 10 years, mainly effective for account holders who die after 2019.
- Individuals aged 70½ and older will be allowed to make deductible contributions to traditional IRAs (for 2020 and later years).
- Increasing the age for required RMDs from age 70½ to age 72 beginning with RMDs required to be made after 2019.
The full text of the tax extenders and SECURE Act provisions are contained in Divisions O and Q of H.R. 1865, available at: www.congress.gov/bill/116th-congress/house-bill/1865/text
Some of these changes may require filing an amended return for one or more years. If you have questions or would like to schedule a tax planning appointment, please give our Corte Madera office a call at 415-924-6240.