The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted on December 27, 2020, deals with the annual tax extenders. Congress made some of them permanent, while others got short- or long-term extensions.
These are the big five Form 1040 tax breaks that were scheduled to expire on December 31, 2020:
- Exclusion from income for cancellation of acquisition debt on your principal residence (up to $2 million)
- Deduction for mortgage insurance premiums as residence interest
- 7.5 percent floor to deduct medical expenses (instead of 10 percent)
- Above-the-line deduction for tuition and fees
- Non-business energy property tax credit for energy-efficient improvements to your principal residence
Here is what Congress did with each of these five provisions:
- Cancellation of debt. Extended through tax year 2025, but with a reduced maximum exclusion from $2 million to $750,000 for discharges of indebtedness after December 31, 2020.
- Mortgage insurance premiums. Extended through tax year 2021 only.
- 7.5 percent floor for itemized medical deductions. This provision is now permanent!
- Tuition and fees deduction. Eliminated, but the lifetime learning tax credit phase-out limit was increased to $80,000 (or $160,000 on a joint return) to increase access to this tax benefit.
- Principal home energy tax credit. Extended through tax year 2021 only.
EXTRA TAX DEDUCTIONS AND CREDITS
Here are three major provisions of the new law:
1. Paid Sick and Family Leave Credits
As you may remember from the March 2020 law, Congress provided two ways to give workers paid sick and family leave:
- Employers received refundable payroll tax credits to fully offset the cost of the government mandate that employers provide paid sick and family leave to their employees.
- Self-employed persons also qualify for paid sick and family leave. They claim a refundable tax credit against their 2020 self-employment tax.
The tax credits require that the self-employed person or the employee was unable to work due to a qualifying situation between April 1, 2020, and December 31, 2020. The maximum non- working days eligible for the tax credits are:
- 10 days for paid sick leave, and
- 50 days for paid family leave.
Under the new law, you now can claim these tax credits for qualifying days through March 31, 2021. The maximum creditable days did not increase.
2. 100 Percent Business Meal Deduction
The new December 27, 2020, law allows you to deduct 100 percent of your business-related expenses for food and beverages provided by a restaurant for amounts paid or incurred after December 31, 2020, and before January 1, 2023.
3. Charitable Contributions
The CARES Act made three major changes to charitable contribution deductions for tax year 2020:
- For individuals, there is no adjusted gross income (AGI) limit for contributions normally subject to the 50 percent and 60 percent limitations. The 2020 no-limit rule does not apply to donor-advised funds.
- For corporations, the 10 percent limitation goes up to 25 percent of taxable income.
- If you are a non-itemizer, you may now deduct above-the-line up to $300 of cash charitable contributions for tax year 2020 only.
The new law enacted on December 27, 2020, extends the increased charitable contribution deduction limits for individuals and corporations to tax year 2021. In addition, in tax year 2021, non-itemizers can deduct above-the-line cash charitable contributions up to $600 on a married- filing-joint return ($300 for singles).
Of course, Congress extended dozens and dozens of other extenders and made many other changes. If you would like to discuss the extenders and changes, please don’t hesitate to contact us.