Congress was not too distracted by impeachment to pull together last-minute legislation for a year-end appropriations measure which included extensions of numerous tax provisions that had already expired or were about to. In a last-minute deal right before Christmas, Congress agreed to revive the expiring tax breaks below, including many that have been gone for nearly two years.
The expired provisions broadly fell into four categories: energy, cost recovery, business, and individual. Most extenders received a new expiration date of 2020. Those that had already expired at the end of 2017 and 2018 are retroactively extended as well. The bill extended the wind power production credit for one year. The $1-a-gallon tax credit that subsidizes biodiesel and renewable biodiesel production is extended through 2022. Here are some of the key extensions that were granted:
• Mortgage Insurance Premiums: Taxpayers can deduct mortgage insurance premiums, subject to a phase-out beginning at $100,000 of AGI. The deduction is available for payments for a principal residence and one other home.
• Medical Deduction: The TCJA reduced the threshold for deducting medical expenses from 10% of AGI to 7.5%, but only for 2017 and 2018. The new law restores the lower 7.5%-of-AGI threshold through 2020.
• Tuition-And-Fees Deduction: The tuition-and-fees deduction which may be claimed above-the-line in lieu of a higher education credit, is subject to a phase-out based on modified adjusted gross income (MAGI). The credit could be either $4,000 or $2,000, depending on MAGI, until the phase-out is complete.
• Work Opportunity Tax Credit: A business may be able to claim a Work Opportunity Tax Credit (WOTC) for hiring workers from certain disadvantaged groups. The basic WOTC equals 40% of the worker’s first-year wages up to $6,000, for a maximum credit of $2,400 per worker, but the credit may reach as high as $9,600 for a disabled veteran.
• Family and Medical Leave Credit: This is a tax credit for employers providing paid family and medical leave to employees. It initially was created to last only through 2019, and is based on wages paid for a maximum leave of 12 weeks. It ranges from 12.5% to 25% of the paid wages.
• Empowerment Zones: Businesses and individual residents within designated empowerment zones are eligible for special tax incentives such as a 20% wage credit, liberalized Section 179 expensing, tax-exempt bond financing and deferral of capital gains tax on the sale of qualified assets sold and replaced.
• Plug-In Vehicles: The new law provides a 10% credit, capped at $2,500, for highway-capable, two-wheeled plug-in electric vehicles. To qualify, battery capacity within the vehicles must be greater than or equal to 2.5 kilowatt-hours.
• 529 Savings Plans: The bill allows certain expenses associated with registered apprenticeship programs to count as qualified higher education expenses for purposes of Sec. 529.
• Kiddie Tax: For 2018-2025, the TCJA revamped the Kiddie Tax rules to tax a portion of an affected child’s or young adult’s unearned income at the rates paid by trusts and estates. Those rates can be as high as 37% or as high as 20% for long-term capital gains and dividends. It is now repealed.
• Disaster Tax Relief: Provides tax relief for victims of various disasters occurring in 2018, 2019, and up to 30 days after enactment of the bill. Eligible taxpayers can make tax-favored withdrawals from retirement plans. The bill also enacts an employee retention credit for eligible employers equal to 40% of qualified wages, which are wages paid to an employee during the time the employer’s business is not operating due to a natural disaster, up to 150 days after the disaster. The bill also implements special rules for disaster-related personal casualty losses and for determining earned income for purposes of the Sec. 32 earned income tax credit. The bill also introduces automatic 60-day filing extensions for certain taxpayers affected by federally declared disasters.
In addition, the combined year-end spending measure features significant changes for retirement-savers and a repeal of three taxes imposed by the Affordable Care Act:
• Cadillac Tax. This was a 40 percent excise tax levied on health insurance plans if their value is above a certain threshold, and was designed to tax high-end employer-sponsored health plans.
• Medical Device Tax. This was a 2.3 percent excise tax levied on the sale of medical devices such as pacemakers, stents, catheters, and artificial joints at the manufacturer or importer level.
The bill also incorporated the text of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which passed the House of Representatives in May but was never voted on by the Senate. The SECURE Act is designed to encourage retirement savings in various ways and to simplify administrative requirements in order to make it easier for employers to offer retirement plans. The bill introduces many other changes, which are discussed in this article: https://www.fuoco.com/resources/tax-alerts/517-retirement-planning-and-the-secure-act-
CONTACT US: Unfortunately, confusion still abounds and this new deal continues the tradition of retroactive and temporary extensions rather than definitively deciding which provisions deserve permanent status. Likewise, another temporary extension will not be effective in boosting long-run productivity or growth. We’ll be in a similar spot come December 2020—will the provisions expire or be extended again? Tax planning is more important than ever in this economic climate. Contact us toll free at 855-534-2727, so that you and your business do not forgo any tax minimization opportunities.
