Federal budget legislation enacted in late December did a lot more than fund the government for another year.
The package included the law that authorized the second round of stimulus payments and a law that cracks down on “surprise” medical bills, for example.
It also includes the Taxpayer Certainty and Disaster Relief Act of 2020, a law that extended numerous tax breaks that otherwise would have expired. That means these breaks are available for not just your 2020 federal tax return that’s due in April but also the one after that — if not longer.
So, with the tax filing season set to officially get underway on Feb. 12, let’s take a look at some of the breaks for individuals that the recent tax law has revived.
1. Medical expense deduction
Taxpayers who itemize their federal income taxes, as opposed to taking the flat standard deduction, might be eligible for the medical expense deduction. This tax break allows you to write off some of various medical and dental costs.
To qualify for this deduction, however, your eligible medical expenses must exceed a certain percentage of your income, which is referred to as a “floor.” And that floor has been in flux since the passage of the Affordable Care Act of 2010, as we detailed in “3 Bold Ways Retirees Can Cut Health Care Costs.”
The latest change is that a medical expense deduction floor of 7.5% has been extended in perpetuity. That is to say, the floor will not revert to 10%, as previously was set to happen.
This change makes it easier to qualify for the medical expense deduction and makes the deduction more valuable for those who qualify for it.
Specifically, this change means that folks whose eligible medical expenses exceeded 7.5% of their adjusted gross income (found on your tax return) can deduct the amount of those expenses that exceeds 7.5% of that income, assuming they otherwise qualify for the deduction.
For help determining whether you’re eligible for the medical expense deduction, try out the IRS website’s interactive tool “Can I Deduct My Medical and Dental Expenses?”
2. Charitable contribution deduction for non-itemizers
Extended: Through 2021
Donations to charity generally are tax-deductible only if you itemize your taxes. But the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March 2020 included a provision that allowed individuals who don’t itemize to deduct up to $300 in cash donations in 2020.
Then, the Taxpayer Certainty and Disaster Relief Act of 2020 expanded and extended this provision, as we report in “2 Charitable Tax Breaks Have Been Extended for 2021.”
3. Mortgage insurance premium deduction
Extended: Through 2021
This tax break treats mortgage insurance premiums like mortgage interest, which is an itemized deduction.
So, the extension of this tax break means that folks who paid mortgage insurance premiums in 2020 — or will pay them in 2021 — can deduct that cost on their tax return if they itemize their deductions and otherwise qualify for the mortgage insurance premium deduction.
For help determining whether you’re eligible for this break, try out the IRS’ interactive tool “Can I Deduct My Mortgage-Related Expenses?”
4. Exclusion for canceled mortgage debt
Extended: Through 2025
If you borrow money from a commercial lender that ends up canceling or forgiving your debt, the amount of the canceled debt could count as income for tax purposes.
With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, however, taxpayers generally could exclude canceled mortgage debt from their taxable income, but only for a limited number of tax years.
5. Residential energy-efficient property credit
Extended: Through 2023
This tax credit is for individuals who have made certain energy-efficient improvements to their homes, such as adding solar electricity, solar water heaters, geothermal heat pumps and small wind turbines.
The residential energy-efficient property credit previously was scheduled to phase out after 2021, but the Taxpayer Certainty and Disaster Relief Act of 2020 extended it as follows:
- For eligible property that is put into service by the end of 2022, the credit will be worth up to 26% of the property cost (which is the same rate that applies for 2020).
- For eligible property that is put into service in 2023, the credit will be worth up to 22% of the property cost.
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