President Signs Spending Bill with Extensive Tax Provisions; Changes May Necessitate Amended Returns for 2018 and Revisions to 2019 Estimates
On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020 (the Act). The Act contains numerous tax provisions, including (1) extensions of credits and deductions that had expired in prior years, as well as some that were scheduled to expire in 2019; (2) the repeal of the Tax Cuts and Jobs Act of 2017 (TCJA) changes to the kiddie tax rules; (3) new disaster relief tax provisions; (4) the permanent repeal of the “Cadillac Tax” on high cost employer sponsored health insurance and two other healthcare taxes; (5) the expansion of Section 529 plans; and (6) major changes to some retirement-related tax provisions. Pub. L. 116-94.
Practice Aid: New CLIENT LETTERS are available to help you explain the Act’s key provisions and potential impact. See ¶320,116 for a sample letter explaining the provisions affecting individuals and ¶320,117 for a sample letter explaining the provisions affecting businesses.
As a year-end holiday gift, Congress included a number of individual and business friendly tax provisions in the year-end spending package. The Act brought back to life many deductions and credits that had expired at the end of 2017, as well as a few others that had either expired at the end of 2018 or were scheduled to expire at the end of 2019. In addition, new disaster-related tax provisions have been added, a trio of unpopular healthcare taxes were repealed, Section 529 plans were expanded, and substantial changes were made to retirement-related tax provisions.
Some of the funding for these changes will come from increases made to various penalty provisions – notably increases in the penalties for failing to timely file a tax return or timely pay the tax due, and a tenfold increase in the penalty for failing to file a Form 5500.
An explanation of the Act’s numerous tax provisions follows.
I. Tax Extenders
The Act extends three dozen expired and expiring deductions and tax credits, generally through December 31, 2020. All but a few of the provisions had expired at the end of 2017 and were extended retroactively to December 31, 2017.
Practice Tip: Amended 2018 tax returns and revisions to previously calculated 2019 tax liabilities may be warranted for clients affected by the Act’s retroactive extension of tax breaks that had expired in 2017.
Individual Tax Extenders
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness: Under Code Sec. 108(a)(1)(E), gross income does not include the discharge of indebtedness of a taxpayer if the debt discharged is qualified principal residence indebtedness which is discharged before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.
Treatment of Mortgage Insurance Premiums as Qualified Residence Interest: For tax years after 2017 and before 2021, Code Sec. 163(h)(3)(E) provides that taxpayers can treat amounts they paid during the year for qualified mortgage insurance as qualified residence interest. The insurance must be in connection with acquisition debt for a qualified residence. This provision had expired on 12/31/2017 and has been extended retroactively.
Deduction of Qualified Tuition and Related Expenses: For tax years after 2017 and before 2021, taxpayers with modified adjusted gross income within certain limits may deduct up to $4,000 of qualified education expenses paid during the year. The deduction under Code Sec. 222(e) for tuition and related expenses is based on qualified education expenses a taxpayer pays for an eligible student who is: (1) himself or herself; (2) his or her spouse; or (3) a dependent for whom the taxpayer would be entitled to claim an exemption on his or her tax return under pre-TCJA rules. The maximum deduction is limited to $4,000 of expenses for taxpayers with modified adjusted gross income that does not exceed $65,000 ($130,000 in the case of a joint return). For taxpayers with modified adjusted gross income that exceeds those amounts, the maximum deduction is $2,000, as long as the taxpayer’s adjusted gross income does not exceed $80,000 ($160,000 in the case of a joint return). This provision had expired on 12/31/2017 and has been extended retroactively.
Reduction in Medical Expense Deduction Floor: For tax years beginning after 2018 and before 2021, the Act extends the provision in Code Sec. 213 which allows a taxpayer to deduct medical expenses to the extent they exceed 7.5 percent of the taxpayer’s adjusted gross income (AGI), rather than the 10 percent of AGI that was scheduled to apply. In addition, there is no adjustment to the medical expense deduction when computing the alternative minimum tax for 2019 and 2020. This provision had expired on 12/31/2018 and has been extended retroactively.
Credit for Health Insurance Costs of Eligible Individuals: The health coverage tax credit in Code Sec. 35 is extended through 2020. The credit is available to taxpayers who receive benefits under certain trade adjustment assistance (TAA) programs or benefits from the Pension Benefit Guaranty Corporation (PBGC). The credit is 72.5 percent of amounts paid for qualified health insurance coverage for eligible coverage months. This provision had expired on 12/31/2017 and has been extended retroactively. Prior to being extended, this provision had been set to expire on 12/31/2019.