Taxpayers will have another shot at a package of tax breaks that would have otherwise expired at the end of 2020. The omnibus spending and coronavirus relief bill recently passed by Congress includes many tax provisions, including the extension of various expiring provisions, extensions and expansions of certain earlier pandemic tax relief provisions, and more.
Some of these deductions and credits have been made permanent, while others have been extended until the end of 2025 — the date when some of the individual provisions from the Tax Cuts and Jobs Act will expire.
Here are the extenders that are incorporated in the latest Covid relief bill:
Back when the Tax Cuts and Jobs Act took effect in 2018, individuals who itemized deductions on their federal income tax return were able to deduct qualifying medical expenses that exceeded 7.5% of their adjusted gross income.
Initially, this provision was set to expire at the end of 2018 and the threshold would have gone up to 10% of adjusted gross income. Lawmakers sought to keep the expense threshold at 7.5% through the end of 2020 and with the passage of the Covid relief act, the lower threshold is now permanent.
However, you can only take this deduction if you itemize on your return. The standard deduction for 2020 is $12,400 for singles and $24,800 for married-filing-jointly.
Lifetime learning credit vs. tuition deduction
The qualified tuition deduction granted an above-the-line write-off for parents of college kids – they could deduct up to $4,000 a year in higher-education tuition costs and other expenses.
Though this tax break was up for renewal at the end of 2020, Congress repealed it in the Covid relief act and expanded the lifetime learning credit instead. This learning credit is worth up to $2,000 per return and can be used to offset the cost of undergraduate, graduate and professional degree courses.
In the Covid relief bill, Congress also made the credit available to higher income taxpayers. The lifetime learning credit begins to decline once single taxpayers’ modified adjusted gross income hits $80,000 or $160,000 for joint filers.
These changes go into effect starting in 2021 and the adjustment eliminates confusion for taxpayers waffling between education credits or the deduction. Deductions reduce your taxable income based on your federal income tax bracket so the higher your bracket, the greater the savings. Meanwhile, credits lower your tax liability on a dollar-for-dollar basis which makes them valuable even if you’re in a lower tax bracket.
Debt forgiveness amid foreclosure
Normally, debt cancellation or forgiveness results in a tax on the borrower. The amount the lender wipes from the balance is deemed income. However, a special tax extender softens the blow for homeowners who’ve had a mortgage balance forgiven due to a short sale or a foreclosure on the dwelling, applicable to debt discharged before Jan. 1, 2021.
This tax break remained intact, but the amount of forgiven debt that can be excluded from your gross income has been reduced. Joint taxpayers can now exclude up to $750,000 in discharged debt ($350,000 for singles), down from an exclusion of up to $2 million for joint taxpayers ($1 million for singles).
This modified write-off is in effect until the end of 2025.
Mortgage insurance premiums
Private mortgage insurance premiums are the additional expense you pay each month if your original down payment on your home was less than 20% of the sales price. The private mortgage insurance tax extender (available through 2021) allows you to deduct these premiums, but only if you itemize deductions.
Those who qualify may be able to deduct the interest on their mortgage and home equity loan or line of credit, up to $750,000 in total qualified residence loans, but the loans must go toward buying, building or substantially improving your home to qualify for the write-off.
Employer payments toward student debt
Due to the CARES Act, employers can make payments toward employees’ student loans and have that amount — up to $5,250 annually — excluded from workers’ taxable income. Though this provision was set to expire at the end of 2020, the new Covid bill grants further relief, allowing the exclusion to apply to payments made through the end of 2025.
Green tax breaks
Here are a few environmentally conscious tax credits that have been renewed through 2021, most of which are most relevant to individual taxpayers.
Nonbusiness energy property credit: This is a credit of up to 10% of the cost of equipment, as much as $500, for energy-efficient home improvements, including heating and air conditioning systems. EnergyStar keeps a list of eligible equipment here.
Qualified fuel cell motor vehicles: This is a $4,000 tax credit for people who purchased cars that run on hydrogen.
Two-wheeled plug-in electric vehicles: This credit is equal to 10% of the cost of your battery-powered scooter, up to $2,500.
Alternative fuel vehicle refueling property: If you install a fueling station at your main house to recharge your green vehicle, you may be eligible for a credit of 30% of the installation cost or up to $1,000.
If you have any questions on how these tax extenders may apply to you, please contact a trusted tax professional. We’d love to help you start 2021 on the right foot by creating a financial plan that will work for you, regardless of your circumstances or the size of your portfolio. Please contact us today to set up a free 30-minute consultation or check out our other blogs related to this topic.