A bevy of federal income tax breaks were set to expire on December 31. This column updates the apparent fate of so-called “tax extenders” that benefit individuals. These are breaks that our beloved Congress has repeatedly allowed to expire before restoring them — often retroactively. Section EE of the 5,593-page Consolidated Appropriations Act of 2021 (the CAA, also known as the coronavirus relief bill) is called the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act). Here’s what the Act would do with the extenders.
Key Point: As this was written, President Trump had not yet signed the CAA into law and had voiced objections to the legislation. However, what I say about the tax breaks covered in this column will almost certainly come to pass one way or the other. That said, stay tuned.
College tuition write-off replaced by more-favorable income phase-out rule for Lifetime Learning credit
For 2020, this deduction can be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 income allows you to be eligible for the deduction, you can claim it whether you itemize or not.
- Taxpayers with 2020 modified adjusted gross income (MAGI) up to $65,000, or up to $130,000 if you’re a married joint-filer, can deduct qualified expenses up to $4,000.
- Taxpayers with 2020 MAGI between $65,001 and $80,000, or between $130,001 and $160,000 if you’re a married joint-filer, can deduct up to $2,000.
- The allowable 2020 deduction goes to zero if your MAGI is more than $80,000, or $160,000 if you’re a married joint-filer.
Development: Before the Act, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 annually. For 2021 and beyond, the Act would align the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Credit, which can be worth up to $2,500 per student. In turn, the Act repeals the college tuition write-off for 2021 and beyond. In effect, the Act would trade the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule. Fair enough. [See IRC Sec. 25A(d)(1), as amended by Act Sec. 104(a), and Act Secs. 104(b) and 104(c).]
More-favorable itemized medical expense deduction threshold made permanent
The Tax Cuts and Jobs Act (TCJA) set the threshold for itemized medical expense deductions at 7.5% of adjusted gross income (AGI). The threshold was scheduled to increase to a daunting 10% of AGI for 2021 and beyond.
Development: The Act would make the 7.5%-of-AGI threshold permanent for 2021 and beyond. Good! [See IRC Sec. 213(a), as amended by Act Sec. 101.]
Tax-free treatment for forgiven principal residence mortgage debt extended with much lower limits
For federal income tax purposes, a forgiven debt generally counts as taxable cancellation of debt (COD) income. However, an exception applies to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the exception, up to $2 million of COD income from principal residence acquisition debt that was cancelled in 2007-2020 qualifies as a federal-income tax-free item ($1 million for married individuals who file separately).
Development: The Act would extend this break to cover principal residence mortgage debt that’s forgiven through 12/31/25. However, for 2021-2025, the maximum amount of forgiven debt that can be treated as tax-free would be reduced to only $750,000 ($375,000 for married individuals who file separately). Fair enough. [See IRC Sec. 108(a)(1)(E), as amended by Act Sec. 114(a).]
Mortgage insurance premium write-off extended
Premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence can potentially be treated as deductible qualified residence interest. The deduction is phased out for higher-income individuals.
Development: The Act would extend this break through 2021. [See IRC Sec. 163(h)(3)(E)(iv)(I), as amended by Act Sec. 133.]
$500 credit for energy-efficient home improvements extended
This break allows you to claim a federal income tax credit of up to $500 for the installation of certain energy-saving improvements to a principal residence. However, the $500 maximum allowance must be reduced by any credits claimed in earlier years. In other words, the $500 amount is a lifetime limitation.
Development: The Act would extend this break to cover qualifying improvements placed in service in 2021. But if you’ve already claimed the credit for an earlier year, you may be ineligible for any further credit. Sorry. [See IRC Sec. 25C(g)(2), amended by Act Sec. 141.]
Credit for fuel cell vehicles extended
You can claim a federal income tax credit for vehicles propelled by chemically combining oxygen with hydrogen to create electricity. The base credit is $4,000 for vehicles weighing 8,500 pounds or less. Heavier vehicles can qualify for credits of up to $40,000. An additional $1,000 to $4,000 credit is available to cars and light trucks to the extent their fuel economy meets federal standards.
Development: The Act would extend this break to cover qualifying 2021 purchases. [See IRC Sec. 30B(k)(1), as amended by Act Sec. 142.]
Credit for plug-in electric motorcycles extended
The 10% federal income tax credit for the purchase of qualifying electric-powered 2-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (i.e., electric-powered motorcycles) can be worth up to $2,500.
Development: The Act would extend this break to cover qualifying 2021 purchases. [See IRC Sec. 30D(g)(3)(E)(ii), amended by Act Sec. 144.]
Credit for alternative fuel vehicle refueling equipment extended
There’s a personal and business federal income tax credit for up to 30% of the cost of installing non-hydrogen alternative fuel vehicle refueling equipment. For your Tesla TSLA, +0.88%.
Development: The Act would extend this break to cover qualifying 2021 expenditures. [See IRC Sec. 30C(g), amended by Act Sec. 143.]
The bottom line
This is still 2020, so anything can happen. But I think what I say here will happen — if not with the legislation that’s currently on President Trump’s desk then with an updated version.
Other individual breaks that would be extended
Beyond the list of time-honored extenders, the Act would also extend and/or liberalize the following tax breaks.
Tax-free treatment for employer payments towards employees’ student loans
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows federal-income-tax-free treatment for payments made by employer-sponsored Section 127 educational assistance plans towards student loan debts of participating employees. Between 3/28/20 and 12/31/20, up to $5,250 per-employee could be paid out (towards principal or interest) with no federal income tax hit for the employee. Employers can deduct the payments.
Development: The Act would extend this break to cover qualifying student loan debt payments made through 12/31/25. [See IRC Sec. 127(c)(1)(B), amended by Act Sec. 120.]
Charitable contribution deductions for non-itemizers
For 2020, individuals who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities. The same $300 limit applies to both unmarried taxpayers and married joint-filing couples.
Development: The Act would extend the $300 break to cover cash contributions made in 2021 and would double the deduction limit to $600 for married joint-filing couples for contributions made in 2021. [See IRC Sec. 170(p) added by Act Sec. 212(a).]
Charitable deduction limit for generous donors
Before 2020, individuals could not claim an itemized charitable deduction for cash contributions to IRS-approved charities that exceeded 60% of adjusted gross income (AGI).
Development: The CARES Act suspended the AGI limit for qualifying charitable contributions made in 2020. The Act would extend that deal into 2021. [See IRC Sec. 170(b)(1)(G)(i), as amended by the Act.]
Credit for solar energy equipment for your home
As I explained in a previous column, there’s a generous federal income tax credit for qualifying solar energy equipment expenditures for your home. For equipment placed in service in 2020, the credit rate is 26%. It was scheduled to drop to 22% for equipment placed in service in 2021 before vanishing entirely for 2022 and beyond.
Development: The Act would extend the 26% credit rate to cover equipment placed in service in 2021 and 2022 and extend the 22% rate to cover equipment placed in service in 2023. For 2024 and beyond, the credit would vanish. [See IRC Sec. 25D(g) and(h), as amended by Act Sec. 148(a).]