Something amazing happened in Washington in December. Yes, there is a new tax bill, but more importantly, the Republicans and Democrats actually agreed on something! They passed what is called the Consolidated Appropriations Act of 2020. It was passed in the House by a vote of 297 to 120, and in the Senate by a vote of 70 to 23.
Why did Congress pass this now?
As much as I would like to say that things are actually changing in Washington, the act was passed mostly because there was a looming government shutdown. The act actually included three different parts. The first thing is the extenders.
What was extended for individuals?
There are essentially four major things that affect a lot of people that were extended:
1. Medical Expenses
The first one is medical expenses as itemized deductions. As most people that actually are able to do itemized deductions and those that are able to deduct some of their medical costs know, the first 7.5 percent of their medical costs are not deductible—it is only everything above that. The law changed and it went to 10 percent. This change [the extenders] brought it back to 7.5 percent. So really what happens is, people are able to deduct more medical expenses than they could if the rules hadn’t changed.
2. Education Costs
The other thing is education costs. We have talked in prior episodes about different credits that are available for sending your kids to school. But there is also an above-the-line deduction that people can get for paying tuition and fees. That expired, but has now come back.
3. Private Mortgage Insurance (PMI)
Also, the treatment of what they call PMI. Prior to it being extended, those (essentially) insurance payments that you were making were treated as interest and you could deduct those on your return. That went away, but now with the extender act, it is back.
4. Home Residences and Foreclosures
Another thing—which we do not see too much anymore now that the housing market is really stable—but if, for some reason, your house was foreclosed on, and you owed more than it was actually worth, normally that difference is included in your income, but it is excluded if it is for your home residence.
What was extended for businesses?
For businesses, there really was not a lot. Most of it was just specialized credits for things like race tracks, race horses and Indian Reservations, energy credits—things like that. But one of the important things that got brought back is the Work Opportunity Tax Credit.
When is this extension in effect?
It really depends on the item, but some of these things actually expired in 2017 or 2018. Even though they expired during those times, the extender package actually made them retroactive, so it is almost like they never went away and there could be some opportunities for people to amend prior returns.
What about changes to the kiddie tax?
That has changed back to the way it used to be. The way it was before, we had to file the parents’ return and the children’s return together, because how much tax the children paid was directly related to how much income the parents earned. With the new tax law that was passed in December of 2018, that changed and it went to the Trust Tables. But they found out pretty quickly that that really disadvantaged some low-income individuals, so they went ahead and brought that back. Now, in order to file a kiddie tax return, you have to also file the parents’ return with it.
