On December 20, President Donald Trump signed into law the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act). The new legislation retroactively resurrects and/or extends a bunch of individual and business federal income tax breaks, which we will call the extenders. The extensions generally go through 2020. This column covers what you need to know about the extenders that are most likely to help individual taxpayers.
As its name indicates, the Act also includes a bevy of federal tax relief provisions for disaster victims. See below for more information on that.
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More-favorable itemized medical expense deduction threshold extended through 2020
The Tax Cuts and Jobs Act (TCJA) set the threshold for itemized medical expense deductions at 7.5% of adjusted gross income (AGI) for 2017 and 2018. The threshold was scheduled to increase to a daunting 10% of AGI for 2019 and beyond. The Act extends the more-taxpayer-friendly 7.5%-of-AGI threshold through 2020.
College tuition write-off resurrected for 2018 and extended through 2020
This deduction can be up to $4,000 annually at lower income levels or up to $2,000 at middle income levels. It expired at the end of 2017. The Act retroactively resurrects the deduction to cover qualified college expenses incurred in 2018 and extends the write-off to cover costs incurred in 2019 and 2020. If you qualify for the deduction based on your income, you can claim it whether you itemize or not.
- Taxpayers with 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 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 deduction goes to zero if your MAGI is more than $80,000, or $160,000 if you’re a married joint-filer.
Break for forgiven principal residence mortgage debt resurrected for 2018 and extended through 2020
For federal income tax purposes, a forgiven debt generally counts as taxable cancellation of debt (COD) income. However, a temporary exception applied to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that was cancelled in 2007-2017 was treated as a tax-free item ($1 million for married individuals who file separately). The Act retroactively resurrects this break to cover eligible debt cancellations that occurred in 2018 and extends the break to cover eligible debt cancellations that occur in 2019 and 2020.
Key Point: The Act allows the exclusion for eligible debt cancellations that occur after 2020 under a binding written agreement that was entered into before 1/1/21.
Mortgage insurance premium write-off resurrected for 2018 and extended through 2020
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. Before the Act, the deduction was only available for premiums paid through 2017. The Act retroactively resurrects this break to cover eligible premiums paid in 2018 and extends it to cover premiums paid in 2019 and 2020. However, the deduction is only available for premiums for qualifying policies issued after 12/31/06 and premium amounts allocable to periods before 2021. Note that the deduction is phased out for higher-income individuals.
$500 credit for energy-efficient home improvements resurrected for 2018 and extended through 2020
Through 2017, you could claim a federal income tax credit of up to $500 for the installation of certain energy-saving improvements to a principal residence. This break expired at the end of 2017, but the Act retroactively resurrects it for 2018 and extends it for 2019 and 2010.
Key Point: The $500 maximum allowance must be reduced by any credits claimed in earlier years. In other words, the $500 amount is a lifetime limitation. So, if you claimed the credit before 2018, you may be ineligible for any further credit.
Credit for fuel cell vehicles resurrected for 2018 and extended through 2020
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. This credit expired at the end of 2017, but the Act retroactively resurrects it to cover qualified vehicles purchased in 2018 and extends the break to cover qualified vehicles purchased in 2019 and 2020.
Credit for plug-in electric motorcycles resurrected for 2018 and extended through 2020
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. The credit expired at the end of 2017, but the Act retroactively resurrects it for 2018 and extends it for 2019 and 2020. Don’t forget to wear your helmet.
Credit for alternative fuel vehicle refueling equipment resurrected for 2018 and extended through 2020 The Act retroactively resurrects the personal and business federal income tax credit for up to 30% of the cost of installing non-hydrogen alternative fuel vehicle refueling equipment placed in service in 2018 and extends the credit for 2019 and 2020. You can claim the credit for a personal recharging station in your garage — that means you, Tesla (TSLA) owners.
Credit for health insurance costs extended through 2020 for the few who qualify
The health coverage tax credit (HCTC) equals 72.5% of the premiums paid by certain very-narrowly-defined individuals for qualified health insurance coverage. The HCTC was scheduled to expire at the end of 2019, but the Act extends it through 2020 for those few folks who qualify. You know who you are.
You may want to file an amended 2018 return
Unless you’ve not yet filed your 2018 return, you’ll need to file an amended return for that year to take advantage of the breaks that were retroactively resurrected for 2018. Ask your tax adviser if it’s worth the trouble.
The bottom line
The extenders legislation is important good news for the individuals who can benefit from it. If you are in that category, you may also want to file an amended 2018 return to take advantage of breaks that were retroactively resurrected for 2018.
One more thing: Best wishes for a happy and prosperous 2020.
More info: Disaster relief provisions
In addition to all the extenders provisions, the Act also includes a bevy of federal tax relief measures for individuals and businesses in areas affected by federally-declared disasters occurring between 1/1/18 and 30 days after the 12/20/19 date of enactment of the new law. Relief measures include the following:
- Exceptions to the 10% early withdrawal penalty for pre-age-59½ withdrawals from retirement plans and IRAs are provided for qualified disaster relief distributions, as defined.
- IRA withdrawals for home purchases that were cancelled due to eligible disasters can be recontributed to the IRAs they came from.
- Flexible rules are provided for retirement plan loans in qualified hurricane relief situations.
- An employee retention tax credit is available to employers affected by qualified disasters. The credit equals 40% of qualified wages, up to $6,000 of wages per eligible employee.
- Limitations on charitable contribution deductions are temporarily suspended for charitable donations related to qualified disaster relief efforts.
- Liberalized rules apply to deductions for qualified disaster-related personal casualty losses.
- And more. Consult your tax adviser for full details.
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