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Individuals: Take Advantage of These 7 Expiring Tax Breaks Before It's Too Late

10/6/20 – Jami Vallandingham & Lisa Riccardi

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Several significant federal tax breaks are set to expire at the end of 2020, unless Congress renews them. Lawmakers customarily extend these so-called "extender" provisions for another year or two, sometimes retroactively. However, in this tumultuous time, nothing is certain.

In the face of that uncertainty, you should consider the following seven tax breaks that are scheduled to go off the books at the end of this year.

1. Tuition and Fees Deduction

If you paid higher education costs this year, you may be eligible to claim either 1) the American Opportunity credit (AOTC), or 2) the Lifetime Learning credit. Alternatively, you may opt for an "above-the-line" deduction for tuition and related fees for 2020.

Note: Higher education tax credits aren't available to high-income taxpayers. Similarly, the tuition-and-fees deduction is also phased out based on your modified adjusted gross income (MAGI) as follow:

2020 Tuition and Fees Deductions

Filing Status

MAGI

Tuition and Fees Deduction

Single

Up to $65,000

$4,000

Single

$65,000 – $80,000

$2,000

Married, filing jointly

Up to $130,000

$4,000

Married, filing jointly

$130,000 – $160,000

$2,000

 

The tuition and fees deduction is completely phased out for individual taxpayers at higher MAGI levels. (The MAGI phaseout amounts are higher for the AOTC.)

2. Medical and Dental Expenses

If you itemize, you may deduct your family's unreimbursed medical and dental expenses above an annual threshold. Recently, the threshold of adjusted gross income (AGI) was lowered from 10% to 7.5%, but only temporarily. Barring further legislation, this AGI "floor" is scheduled to revert to 10% after 2020.

If you're above or near the 7.5%-of-AGI floor for 2020, it generally makes sense to accelerate nonemergency medical and dental expenses into this year. For example, you might schedule a physical exam or dental cleaning for December. The extra amounts may put you over the threshold or boost your deduction. 

3. Mortgage Debt Forgiveness

Usually, if a debt is forgiven or cancelled, it results in taxable income to the debtor. But Congress carved out a special exception for mortgage debt forgiveness that's now set to expire after 2020.

Briefly stated, no tax is due on up to $2 million of debt forgiveness on a mortgage if the mortgage was used to buy, build or substantially improve a principal residence. The exemption is still available after 2020 for binding written agreements entered into before 2021. Certain taxpayers may benefit from this provision during the ongoing COVID-19 pandemic.

4. Mortgage Insurance Premiums

Are you paying mortgage insurance on your home? The tax law allows you to deduct the premiums, within certain limits, on your 2020 return.

As with the mortgage debt forgiveness break, the expense must be incurred to buy, build or substantially improve your home. However, the mortgage doesn't have to be for your principal residence — a second home, like a vacation home, also qualifies.

Unfortunately, this deduction is phased out for an AGI between $100,000 and $109,000. Therefore, higher-income taxpayers can't benefit.

5. Home Energy Credits

In recent years, taxpayers have been able to claim a wide variety of energy credits, based on several energy sources. These credits have had differing expiration dates and requirements.

One of the most popular green tax breaks — the 10% residential credit — is scheduled to expire on December 31, 2020. The maximum credit for energy-saving improvements made to a principal residence is $500. It applies to the following home energy expenses:

  • Air source heat pumps,
  • Central air conditioning,
  • Gas, propane or oil hot water boilers,
  • Gas, propane or oil furnaces or fans,
  • Non-solar water heaters,
  • Advanced main air circulating fans, and
  • Biomass stoves.

It's important to note that the $500 maximum credit is reduced by expenses claimed in prior years.

6. Health Care Premium Credits

The premium tax credit is a refundable credit that was designed to help eligible individuals and families with low-to-moderate income afford health insurance purchased through the health care exchange or Marketplace. The size of the premium credit is based on a sliding scale. The lower the income, the higher the credit.

To be eligible for this credit, the taxpayer's household income can't exceed 400% of the federal poverty line for the family's size. Other rules and restrictions apply.

7. Disaster-Area Relief

Though the Tax Cuts and Jobs Act (TCJA) generally suspends deductions for casualty losses for 2018 through 2025, it still allows individuals to claim casualty losses for losses in a federal disaster area. Under the TCJA, this deduction was limited to 10% of AGI, however.

The Taxpayer Certainty and Disaster Relief Act, enacted earlier this year, provides additional disaster relief. For example, it eliminates the 10%-of-AGI limit for qualified disasters occurring from January 1, 2018, through January 19, 2020. So, technically, this special relief has already expired. But it's possible that, once the dust settles from the November elections, Congress could revive the same or similar tax benefits for other disasters occurring this year.

Wait and See

Will these seven tax breaks survive past midnight on December 31? It remains to be seen. Contact your VonLehman tax advisor with any questions about your situation.