Extension of Expiring Provisions
The House of Representatives and the Senate both passed the Consolidated Appropriations Act of 2021 on December 21, 2020, and the President is expected to sign it into law. While the main purpose of the Act is funding the federal government through the end of the government’s current fiscal year, it includes many tax-related provisions.
Charitable Deduction for Non-Itemizers: The special rule for charitable deduction for non-itemizers (discussed on page 6 of the Tax Year 2020 M+O=CPE Individual Tax Year-End Workshop Reference Book) is extended through 2021 and is enhanced for the 2021 tax year. The limit on the deduction is increased to $600 for a joint return, and the penalty for understatement of tax due to this deduction is increased.
Itemized Deduction Charity Limit: The special rule for charitable deduction for itemizers (discussed on page 33 of the Tax Year 2020 M+O=CPE Individual Tax Year-End Workshop Reference Book) is extended through 2021.
Exclusion of Certain Student Loan Payments Made by Employers: The special rule for excluding certain student loan payments made by employers (discussed on page 33 of the Tax Year 2020 M+O=CPE Individual Tax Year-End Workshop Reference Book) is extended through 2025.
Employee Retention Credit: The credit (discussed on pages 34 to 35 of the Tax Year 2020 M+O=CPE Individual Tax Year-End Workshop Reference Book) is extended through July 1, 2021. In addition, for quarters beginning after December 31, 2020, the credit is expanded from 50% to 70% of qualified wages; qualified employers include those with a 20% decline in gross receipts (instead of a 50% decline); employers with 500 or fewer employees are eligible (instead of 100 employees). In addition, retroactive to March 27, 2020, the Act provides that employers who receive Payroll Protection Program (PPP) loans may still qualify for the employer retention credit with respect to wages that are not paid with forgiven PPP proceeds.
Certain tax provisions that were scheduled to expire after 2020 are discussed on pages 50 to 51 of the Tax Year 2020 M+O=CPE Individual Tax Year-End Workshop Reference Book. The Act extends many of those provisions. Highlights include the following.
Medical Expense Threshold: The 7.5% threshold is made permanent. Under prior law, it was scheduled to become 10% after 2020.
Above-the-Line Deduction for Higher Education/Fees: The Act repeals this deduction beginning in 2021. However, also effective in 2021, the phaseout threshold for the lifetime learning credit is increased to match the threshold used for the American Opportunity Credit (i.e., $80,000 for unmarried individuals or $160,000 for married individuals filing joint returns, with full phaseout occurring when income exceeds $90,000 and $180,000, respectively).
Deduction for PMI: The deduction of private mortgage insurance (PMI) premiums on Schedule A has been extended through 2021.
Discharge of Home Mortgage: The exclusion of income on the discharge of up to $2 million of home acquisition indebtedness secured by a principal residence is extended through 2025.
Residential Energy Credit: The $500 residential energy property credit has been extended through 2021.
Solar Equipment Credit: The credit for solar equipment, reported on page 1 of Form 5695, Residential Energy Credits, has been extended. The credit is now scheduled to remain 26% for the 2021 and 2022 tax years and 22% for the 2023 tax year. It is now scheduled to expire after 2023.