Unless Congress takes action in the next few months, several significant federal tax breaks will expire at the end of this year. In the past, lawmakers have routinely made “extender” provisions to continue expiring tax breaks for another year or two.
However, with the disruptions caused by COVID, the likelihood of that occurring remains uncertain. Here are five tax breaks — set to expire soon — that you should consider utilizing.
1. Medical and Dental Expenses
With the Affordable Care Act going before the Supreme Court soon, healthcare and its costs have become a much discussed topic. Our current public health crisis has increased the attention even more. Another, less known health cost issue is deductions for unreimbursed medical and dental expenses.
If you itemize, you may deduct these expenses above an annual threshold. Currently, the threshold of adjusted gross income (AGI) is 7.5%. But barring further legislation, it is set to increase to 10% after 2020. So, if you’re above or near the current 7.5% threshold, it may make sense to accelerate non-emergency medical expenses (such as physical exams or dental cleanings) that may put you over the threshold or boost your deduction.
2. Healthcare Premium Credits
Another healthcare related tax break is the premium tax credit for low-to-moderate income families and individuals. Created to help those taxpayers afford health insurance purchased through the healthcare exchange or Marketplace, it’s set to expire at the end of this year.
The size of the premium credit is based on a sliding scale. The lower the income, the higher the credit. To be eligible for this credit, the taxpayer’s household income can’t exceed 400% of the federal poverty line for the family’s size. Other rules and restrictions apply.
3. Mortgage Debt Forgiveness
Cancelled or forgiven debt is usually considered taxable income. But Congress had previously made a special exception for mortgage debt forgiveness — an exception that is set to expire in 2021.
In general, no tax is due on debt up to $2 million of forgiveness on a mortgage if the mortgage was used to buy, build or substantially improve a principal residence. The exemption is still available after 2020 for binding written agreements entered into before 2021, and certain taxpayers may benefit from this provision during the ongoing COVID-19 pandemic.
4. Mortgage Insurance Premiums
If you’re paying mortgage insurance on your home, tax law permits you to deduct the premiums, within certain limits, on your 2020 return.
Similar to the mortgage debt forgiveness break, the expense must be incurred to buy, build or substantially improve your home. There is no provision requiring the mortgage to be for your principal residence, so a second home (like a vacation home) qualifies as well.
However, this deduction is phased out for an AGI between $100,000 and $109,000. Therefore, higher-income taxpayers can’t benefit.
5. Home Energy Credits
Taxpayers have recently been able to claim a wide variety of tax credits based on the energy source (or sources) they use in their home — each with differing expiration dates and requirements. One of the most popular — the 10% residential green tax break — is set to expire this year. This tax credit — worth up to $500 — applied to energy-saving improvements made to a primary residence, including:
- Air source heat pumps
- Central air conditioning
- Gas, propane or oil hot water boilers
- Gas, propane or oil furnaces or fans
- Non-solar water heaters
- Advanced main air circulating fans
- Biomass stoves.
It’s important to note that the $500 maximum credit is reduced by expenses claimed in prior years.
Wait and See
Will these tax breaks survive into 2021? It’s not clear, nor is it certain. Contact us at Filler to get a jump start on your taxes and take advantage of any breaks you may be eligible for.