What has happened recently which affects tax filing season 2021!
- Many tax provisions are set to expire or change starting in 2021 – how might this shape tax policy?
When Congress enacts tax changes, they may be only temporary, and in larger bills, lawmakers sometimes include “sunsets” or future modifications that help reduce the overall cost of the legislation. Examples can be found in the tax provisions commonly known as “tax extenders,” as well as in recent legislation such as the Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
While the recently enacted Consolidated Appropriations Act, 2021, made some tax extenders permanent, it extended other key ones through 2025, including the controlled foreign corporation look-through rule and the Work Opportunity Tax Credit. The expiration date of these tax extenders now aligns with sunset of several key TCJA provisions.
The fate of these tax provisions, and the revenue implications associated with them, have the potential to shape tax policy ─ and they may show up in different pieces of legislation throughout the congressional session. Some have bipartisan support. As such, businesses that have an interest in these provisions should be aware of the changes, model out the potential impacts and consider engaging with policymakers as appropriate.
Tax “Extenders”:
There’s a group of tax breaks that are constantly scheduled to expire, but that keep getting extended by Congress for another year or two. These tax breaks are collectively referred to as “tax extenders.”
Several of the “tax extender” deductions and credits were set to expire after 2020…but guess what happened. Yep, Congress kicked the can down the road once again and renewed many of them on a temporary basis. Most of the extended tax breaks are for businesses, but several of them impact individual taxpayers.
Tax breaks for individuals that were extended until the end of 2021 include the:
- Mortgage insurance premiums deduction;
- Health coverage tax credit for medical insurance premiums paid by certain Trade Adjustment Assistance recipients and people whose pension plans were taken over by the Pension Benefit Guaranty Corporation;
- Nonbusiness energy property credit for certain energy-saving improvements to your home (e.g., new energy-efficient windows and skylights, exterior doors, roofs, insulation, heating and air conditioning systems, water heaters, etc.);
- Fuel cell motor vehicle credit;
- Alternative fuel vehicle refueling property credit; and
- Two-wheeled plug-in electric vehicle credit.
The exclusion for forgiven mortgage debt was also renewed through 2025 (although the maximum amount that can be excluded is reduced from $2 million to $750,000).
In addition, the 26% rate for the residential energy efficient property credit was extended through 2022 (the credit applies to the cost of solar electric property, solar water heaters, geothermal heat pumps, small wind turbines, fuel cell property, and qualified biomass fuel property). The rate was previously scheduled to drop to 22% in 2021, but now it won’t be reduced until 2023. The credit is then set to expire after 2023.
Two tax breaks for individuals were made permanent, too. First, the 7.5%-of-AGI threshold for deducting medical expenses won’t be raised. It was scheduled to jump to 10% after 2020. The exclusion for state or local tax benefits and reimbursement payments provided to volunteer firefighters and emergency medical responders is now a permanent tax break as well.
I