The Taxpayer Certainty and Disaster Tax Relief Act of 2019 was one of those legislative moves that rescue expiring tax credits. This particular bill was first introduced in June 2019 by Congressman Mike Thompson of California’s Fifth District. It included mostly retroactive relief, paving the way for future legislation to preserve certain tax breaks.
Altogether, this flurry of legislation saves the tax deductions for mortgage insurance premiums, as well as tuition and education fees, and it favorably tweaks the itemized medical expense deduction, too. But some provisions still have expiration dates.
The Further Consolidated Appropriations Acts
Portions of the Taxpayer Certainty and Disaster Tax Relief Act were ultimately absorbed into the Further Consolidated Appropriations Act of 2020 and the Consolidated Appropriations Act of 2021. The provisions mentioned here are just some of the many that are buried in the numerous pages of all this legislation, and may have a direct affect on how you file your taxes this year.
Reputable tax preparation software should be up to date on these changes, but you may still want to consider consulting with a tax professional if you prefer to prepare your taxes yourself the old-fashioned way.
Qualified Principal Residence Indebtedness
One of the more critical provisions that made it into the Further Consolidated Appropriations Act is the exclusion from taxable income of qualified principal residence indebtedness. This gift from Uncle Sam for victims of home foreclosures initially expired on Dec. 31, 2017, but it was revived until Jan. 1, 2021, meaning it applies to your 2020 tax return.
The exclusion works like this: Perhaps you lose your home to foreclosure, and the lender forgives your $300,000 remaining mortgage balance. You’re no longer legally obligated to repay that money—except the expiration of the qualified principal residence indebtedness provision would have required that you include that $300,000 in your taxable income for the year.
This tax law changed that, and taxpayers didn't have to include this type of debt forgiveness as taxable income through the end of 2020.
The Mortgage Insurance Premiums Deduction
The mortgage insurance premiums tax deduction also expired on Dec. 31, 2017, but the Further Consolidated Appropriations Act breathes new life into it through Dec. 31, 2020. That means taxpayers can once again claim a tax deduction for amounts they pay toward mortgage insurance when they file taxes in 2021, subject to numerous rules.
The IRS provides an interactive tool to help you determine whether you qualify for the mortgage insurance premiums tax deduction.
The Itemized Medical Expense Deduction
The itemized medical expense deduction never technically expired, but its adjusted gross income (AGI) thresholds have changed over the years.
The Affordable Care Act hiked the threshold from 7.5% to 10% of a taxpayer’s AGI in 2010, meaning you could only claim a deduction for these expenses that exceeded this 10% figure. For example, if you paid $10,000 in qualifying medical expenses, including most health insurance premiums, you could only claim an itemized deduction for $2,500 of those expenses—the portion that exceeded 10% or $7,500 of your AGI if your AGI was $75,000.
The Tax Cuts and Jobs Act (TCJA), passed in 2017, dropped it back to 7.5%—but only for tax years 2017 and 2018. The threshold was slated to increase back to 10% effective Jan. 1, 2019 under the terms of the TCJA, but the Further Consolidated Appropriations Act keeps it at 7.5% through the end of the 2020 tax year.
The Qualified Tuition and Fees Deduction
This one came as a nice tax break because taxpayers can take it “above the line.” You could claim it and itemize other deductions, or claim it and the standard deduction. Normally, you must choose between itemizing or claiming the standard deduction—you can’t do both—but as an “above-the-line” deduction, this deduction fell outside the usual rules.
You could claim this deduction for up to $4,000 of what you spent on qualifying tuition and education fees, subject to certain AGI restrictions. The deduction expired on Dec. 31, 2017, but the Further Consolidated Appropriations Act changed that expiration date to Dec. 31, 2020, making it applicable for the taxes you pay in 2021.
Coronavirus Tax Relief
Finally, still more legislation—the Coronavirus Aid, Relief, and Economic Security (CARES) Act—came along to provide another helpful provision for tax year 2020. You can claim the Recovery Rebate Credit on your 2020 tax return if you didn’t receive an economic impact payment in 2020 but you should have, or if the amount you received is less than what you are entitled.
The IRS announced late in 2020 that you can claim an above-the-line adjustment to income on your 2020 tax return, too. Donations of up to $300 made on or before Dec. 31, 2020 are eligible. It’s a one-time break for the 2020 tax year only. Remember, these adjustments can be taken in addition to itemizing or claiming the standard deduction.