Tax Deductions Extended for 2019 and 2020

Mortgage insurance, tuition and fees deductions are back for a limited time

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The Taxpayer Certainty and Disaster Tax Relief Act of 2019 was one of those legislative moves that taxpayers wait anxiously for year to year. These laws often swoop in to rescue expiring tax credits, and many of these credits tend to be popular with the public.

This particular bill was first introduced on June 18, 2019, by Congressman Mike Thompson of California’s Fifth District, and it was signed into law by President Trump—sort of—about six months later on Dec. 20, 2019. Among other provisions, it saves the tax deductions for mortgage insurance premiums and tuition and education fees, and it favorably tweaks the itemized medical expense deduction as well.  

The Further Consolidated Appropriations Act of 2020

The new law didn’t end up being titled the Taxpayer Certainty and Disaster Tax Relief Act. That act more or less died a quiet and natural death in late 2019, but some of its provisions—although not all of them—were absorbed into another law: the Further Consolidated Appropriations Act, 2020. This was the act that was actually signed by the President on Dec. 20, 2019. 

The Taxpayer Certainty and Disaster Tax Relief Act wasn’t passed in its entirety, but many of its most important provisions are included in the Further Consolidated Appropriations Act of 2020 and have become law.

A Notable Change

Congress renews expiring tax credits with some regularity, but it usually does so retroactively. This trend can have the effect of forcing taxpayers to go back and amend their returns to grab a tax break that was technically unavailable at the time they filed. If nothing else, it causes untold confusion. For example, the Bipartisan Budget Act of 2018 was signed into law on Feb. 9, 2018, midway through the tax season, salvaging some tax provisions that had technically expired on Dec. 31, 2017.

Congressman Thompson’s goal was to resuscitate tax provisions in advance of their expiration dates. The idea was to breathe new life into them for the 2017, 2018, and 2019 tax years before 2019 drew to a close—and that did end up happening.

Some of the terms included in the Further Consolidated Appropriations Act version of the law also provide relief to disaster victims who were affected on or after Jan. 1, 2018. 

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 expired on Dec. 31, 2017, but it’s now alive and well until Jan. 1, 2021. 

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. Great—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.  

Well not anymore—at least not 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. Taxpayers can once again claim a tax deduction for amounts they pay toward mortgage insurance, 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, and taxpayers may have been left holding their heads in their hands. How much can they deduct on a tax return in this particular year?

In 2010, the Affordable Care Act hiked the threshold from 7.5% to 10% of a taxpayer’s AGI. You could only claim a deduction for expenses that exceeded this 10% figure. For example, if you paid $10,000 in qualifying medical expenses, including most health insurance premiums, but your AGI was $75,000, you could only claim an itemized deduction for $2,500 of those expenses—the portion that exceeded 10% or $7,500 of your AGI.

The Tax Cuts and Jobs Act (TCJA), enacted 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 tax year 2020.

The Qualified Tuition and Fees Deduction

This one was a nice tax break because taxpayers could take it “above the line.” In tax lingo, this means that 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, it 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 changes that expiration date to Dec. 31, 2020.

Disaster Tax Relief

Finally, the Further Consolidated Appropriations Act addresses any event declared by the President to have been a federal disaster beginning on Jan. 1, 2018 up through 30 days after the Dec. 20, 2019 signing of the law.

The tax code previously stated that taxpayers could only claim a casualty loss deduction for losses that exceeded 10% of their AGIs, but the Further Consolidated Appropriations Act waives this rule for disasters that occurred during the above time period. Additionally, taxpayers don’t have to itemize to claim the deduction. 

You won’t be charged that 10% early withdrawal penalty, either, if you were forced to tap into your qualifying retirement plan for financial assistance due to a disaster during this time. You’ll also have an extra 60 days to file your tax return.

Taxpayers who experienced a disaster during this time can use their 2018 income figures to qualify for certain tax credits for the 2019 tax year if their income in 2018 was less than their income in 2019. This is a good thing because several tax credits may become unavailable if you earn too much. 

Just the Tip of the Iceberg

The provisions mentioned here are just some of the many that are buried in the 715 pages of the Further Consolidated Appropriations Act. Remember, select provisions of the Taxpayer Certainty and Disaster Tax Relief Act were incorporated into this signed law along with numerous other changes.

Some tax credits for home and vehicle energy efficiency have been extended, too, along with employment incentives and certain business tax credits. But to pave the way for the 2020 filing season when you file your 2019 tax return, this article focused specifically on some of the most popular tax breaks that had expired and were pulled back into the fold in late 2019. Reputable tax preparation software should be up to date on these changes, but you might still want to touch base with a tax professional if you prefer to prepare your taxes yourself the good, old-fashioned way.

Article Sources

  1. GovTrack. "H.R. 3301: Taxpayer Certainty and Disaster Tax Relief Act of 2019." Accessed Jan. 29, 2020.

  2. United States Congressman Mike Thompson. "Chairman Thompson Introduces Taxpayer Certainty and Disaster Relief Act." Accessed Jan. 29, 2020.

  3. Congress.gov. "H.R.1892 - Bipartisan Budget Act of 2018." Accessed Jan. 29, 2020.

  4. Tax Foundation. "Budget Deal Would Retroactively Extend Several Expired Tax Provisions." Accessed Jan. 29, 2020.

  5. IRS. "Topic No. 431 Canceled Debt – Is It Taxable or Not?" Accessed Jan. 29, 2020.

  6. Congress.gov. “H.R. 1865: Further Consolidated Appropriations Act, 2020.” Accessed Jan. 29, 2020.

  7. U.S. House of Representatives Document Repository. "Compilation of Patient Protection and Affordable Care Act." Accessed Jan. 29, 2020.

  8. Tax Policy Center. "How Did the TCJA Change the Standard Deduction and Itemized Deductions?" Accessed Jan. 29, 2020.

  9. eFile. "College Education and Tax Deductions." Accessed Jan. 29, 2020.

  10. IRS. "Publication 970: Tax Benefits for Education," Page 44-45. Accessed Jan. 29, 2020.

  11. IRS. "Tax Benefits for Education: Information Center." Accessed Jan. 29, 2020.

  12. IRS. "Publication 547, Casualties, Disasters, and Thefts." Accessed Jan. 29, 2020.