The U.S. Congress closed out 2019 by approving a variety of tax law changes that will impact everything from retirement savings to government spending.
In addition to the new SECURE Act, lawmakers approved the Further Consolidated Appropriations Act, which extended certain income tax provisions that had expired, as well as some that were due to expire at the end of 2019.
Congress traditionally passes so-called “extenders” annually, but it neglected to do so for 2018. As a result, several popular breaks for both individuals and businesses expired at the end of 2017.
The new legislation extends multiple tax provisions — some of which were established on a temporary basis by the Tax Cuts and Jobs Act (TCJA) — through 2020. Here’s a closer look:
Exclusion of discharge of mortgage debt. Homeowners who have undergone foreclosure, a short sale, or a loan modification — or otherwise had mortgage debt forgiven — can exclude up to $2 million of the debt from their gross income (or $1 million for married individuals filing separately). The debt generally must have resulted from the acquisition, construction, or substantial improvement of their principal residence. The law also modifies the exclusion to make it apply to debt discharged under a binding written agreement entered into before Jan. 1, 2021.
Before this change, the exclusion applied only to debt forgiven in calendar years through 2017 and debt discharged in 2018 under a written agreement entered into in 2017.
Deduction for mortgage insurance premiums. Homeowners now can continue to treat their qualified mortgage insurance premiums as deductible mortgage interest — assuming they itemize their deductions. The deduction begins to phase out when adjusted gross income (AGI) exceeds $100,000 ($50,000 if married filing separately). This deduction had expired at the end of 2017.
Deduction for unreimbursed medical expenses. The TCJA reduced the threshold for deducting unreimbursed medical expenses from 10% to 7.5% of AGI for 2017 and 2018. The lower threshold now has been extended through 2020. Qualified medical expenses in excess of the threshold can be claimed as an itemized deduction.
Qualified medical expenses include payments to physicians, dentists, and other medical practitioners, as well as for certain equipment (including glasses, contacts, and hearing aids), supplies, diagnostic devices, and prescription drugs. Travel expenses related to medical care are deductible, too.
Deduction for qualified tuition and related expenses. The above-the-line deduction for higher education expenses reduces a taxpayer’s AGI and is available regardless of whether the taxpayer itemizes (although it generally can’t be taken if certain tax credits for education expenses are claimed). The deduction is limited to $4,000 for individual taxpayers whose AGI doesn’t exceed $65,000 ($130,000 for joint filers) or $2,000 for individuals whose AGI doesn’t exceed $80,000 ($160,000 for joint filers). This deduction had expired at the end of 2017.
Incentives for empowerment zones. The law extends the incentives — including tax-exempt bonds, employment credits, increased expensing on qualifying equipment, and capital gains deferral on the sale of qualified assets sold and replaced — for eligible businesses and employers to operate in the 41 specifically designated economically distressed areas.
New Markets Tax Credit (NMTC). Businesses can earn NMTCs for investments in real estate projects, community facilities, and operating businesses in low-income communities. The credit generally equals 39% of the original investment amount, claimed over a period of seven years beginning on the date of the investment.
The new law provides a $5 billion allocation for the credit for 2020 and extends for one year, through 2025, the carryover period for unused credits (that is, carrying over from years in which the credit amount exceeds the taxpayer’s tax liability). In certain circumstances, the NMTC can enhance the tax benefits of investing in empowerment zones.
Employer tax credit for paid family and medical leave. The TCJA created a new tax credit for certain employers that provide paid family and medical leave but made it available only for 2018 and 2019. Eligible employers can now claim the credit through 2020 if they have a written policy providing at least two weeks of such leave annually to all qualifying employees, both full- and part-time (the requisite leave for part-timers is determined on a prorated basis). Employers must also meet certain other requirements.
The amount of the credit begins at 12.5% of wages paid if the leave payment rate is at least 50% of the normal wage rate. The percentage rises incrementally by 0.25 percentage points as the rate of leave payment exceeds 50%, with a maximum credit of 25% when full wages are paid for the leave.
The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.
Work Opportunity Tax Credit (WOTC). The WOTC was due to expire at the end of 2019. It’s available to employers that hire individuals who are members of 10 targeted groups, including certain qualified veterans, ex-felons, and certain individuals receiving state benefits. Employers that hire such employees can claim the tax credit as a general business credit against their income tax.
Changes to these laws could affect your next tax filing. We can help you chart the best course, so reach out to a KraftCPAs representative for help.