Up to $2 million of mortgage indebtedness discharged (forgiven by the lender) on a taxpayer's primary home may be excluded from gross income through 2020.
Prior to the new legislation, the discharge of up to $2 million of debt ($1 million for married couples filing separately) from a qualified principal residence was excluded from gross income, but only if it occurred before January 1, 2018. The new law extends this exclusion to the end of 2020 and makes it retroactive to January 1, 2018. Thus, the provision is effective for discharge of debt occurring AFTER December 31, 2017 and BEFORE January 1, 2021.
Maria and Anthony, a married couple, own their principal residence, valued at $400,000 with a mortgage balance of $300,000. Anthony loses his job, and the couple can no longer afford the payments. The lender forecloses on the property and sells the residence for $225,000. The $75,000 of additional debt remaining is discharged. The couple does not need to recognize the $75,000 as gross income under the extender provision.
Who might benefit:
Taxpayers who aren’t bankrupt or insolvent, but have financial difficulty and can no longer afford their mortgage payments. The relief may apply in foreclosures, short sales and loan restructurings.
Qualified mortgage insurance (QMI), premiums paid (or accrued) in connection with acquisition indebtedness on a qualified residence may be treated as “qualified residence indebtedness.” QMI is typically always required for FHA type loans. For conventional loans, the lender generally requires QMI for a down payment of less than 20%. It is referred to as “PMI” when it’s private mortgage insurance with a conventional loan. Qualified residence interest (QRI or “mortgage interest”) is an itemized deduction for income tax purposes, subject to certain limitations. Thus, having deductible QMI or PMI increases a taxpayer’s qualified mortgage interest deduction. The deductibility of QMI is subject to a phase out if the taxpayer’s adjusted gross income is over $100,000 ($50,000 if married filing separately).
The new law extends this provision to the end of 2020 and makes it retroactive to January 1, 2018. Thus, the provision is effective for tax years 2018-2020.
James, a single individual with adjusted gross income of $80,000, purchases a qualified residence in the current year. Since James does not have enough cash for a 20% down payment on a conventional loan, he is required to pay for mortgage insurance. James paid $2,500 of QMI premiums in the current year in addition to $10,000 of qualified residence interest on the loan. Assuming special allocation rules don’t apply in the case of certain loans, the $2,500 as well as the $10,000 of QRI are all deductible in the current year.
Variation: James has adjusted gross income (AGI) of $106,000. A portion of the $2,500 will be disallowed because he exceeds the $100,000 phase-out threshold. If his AGI exceeded $110,000, none of the $2,500 would be allowed due to the phase-out rules.
Who might benefit:
The current tax law provides a much higher standard deduction—essentially double—what was available prior to tax reform. Many taxpayers who previously itemized now take the standard deduction. In a year when QMI premiums are paid, that amount combined with other deductions might be more than the standard deduction, which will allow the taxpayer more tax savings for the year.
The new law extends a reduction in the medical expense AGI floor to 7.5% for both regular tax and AMT purposes for tax years 2019 and 2020.
The law previously provided that for 2017 and 2018, individuals could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of AGI. Beginning in 2019, the AGI floor was to return to 10%.
The Disaster Act extends the 7.5% threshold for two more years (i.e., 2019 and 2020).
Henrietta and William have a sick child, Charles, who is their dependent. In the current year, Charles requires numerous surgeries, medication and therapy, much of which is unreimbursed by insurance. The total out of pocket unreimbursed costs for the family is $30,000. Henrietta and William file a joint income tax return for federal purposes and have AGI of $150,000. The 7.5% AGI floor means that the first 7.5% of their AGI (or $11,250) will result in a disallowance of that amount. The remaining amount over the non-deductible floor ($30,000 - $11,250 = $18,750) is deductible as an itemized deduction. Had the AGI floor been 10%, the couple would not have been able to deduct the first $15,000 of the expenses, leaving the remaining $15,000 as an itemized deduction. Thus, the extender provision provides this couple an additional $3,750 in deductions for the year.
Who might benefit:
Taxpayers who have large medical expenses in the current year for themselves, their spouses or their medical dependents will have an opportunity to deduct a larger portion of their unreimbursed qualified medical care costs if they itemize their deductions for the year.
Qualified tuition and other related higher education expenses may be taken as an “above the line” deduction. If AGI is below $65,000 ($130,000 for joint returns), up to $4,000 is allowed. If AGI is between $65,000 and $80,000 (or between $130,000 and $160,000 for joint returns), the allowable deduction is $2,000. For AGI above these thresholds, no deduction is allowed. Unlike a phase-out, the AGI levels provide only three possible deductions: $4,000, $2,000 or $0.
The Disaster Act retroactively extends this deduction for tax year 2018 and remains in effect through 2020.
Sheila is 30 years old and no longer a dependent of her parents. She has AGI of $60,000 per year and has paid qualified tuition expenses of $6,000 in the current year. She is allowed to deduct $4,000 as an above the line deduction.
Variation: Sheila has AGI of $68,000. Since her AGI is over $65,000 she is now limited to a $2,000 deduction. If Sheila has AGI over $80,000, she is allowed no deduction.
Who might benefit:
Families paying for higher education costs with AGI below the required thresholds and individuals who are no longer considered dependents of their parents may get to take either $4,000 or $2,000 as applicable off of their gross income in arriving at AGI, regardless of whether they itemize their deductions or take the standard deduction.
A credit is provided to individuals on amounts paid or incurred for certain energy efficient improvements to a primary residence. The residence can be a house, houseboat, mobile home, co-op apartment or condominium, but it must be in the United States. A 10% credit is available for to energy-efficient “building envelope components,” which can include insulation, exterior windows or doors and metal or asphalt roofs. A credit is also available for certain energy-efficient heating and cooling systems. The total credit is limited to $500, with additional caps placed on the credit available for certain components (e.g., $200 for windows), minus any credits claimed in previous years.
The extender provision retroactively applies this credit through the end of 2020 and applies to property placed in service after December 31, 2017. Thus, it includes tax year 2018.
Leisha and Chad installed energy efficient doors that meet the energy efficient standard requirements for the current year. The total cost of the doors was $1,500. Leisha and Chad may take up to $500 in credit on their joint tax return as a nonbusiness energy credit, assuming they haven’t previously taken any credit in prior years.
Who might benefit:
Since the benefit is a credit and not a deduction, any taxpayer who makes qualifying expenditures on their principal residence may qualify. In other words, there is no need to itemize deductions in order to take this credit.
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Updated for tax year 2020
Updated for tax year 2019