Module 13: TAX EXTENDERSSpecial thanks to: Barbara DelBene for her contribution to content provided in this module.

…you will be ready to prepare VITA returns that involve tax law issues that were changed by the Tax Extender and Disaster Relief Act of 2019.

This includes tax law changes that affect:

➢Schedule A, Itemized Deductions (advanced issues)

• Mortgage insurance premiums

• Lower AGI percentage limit for medical expense deduction

➢Tuition and fees deduction as an alternative to education credits (basic issue)

➢Discharge of Qualified Principal Residence Indebtedness (advanced issue)

➢Residential Energy Credit (advanced issue)

By the end of this module…

Introduction to Tax Extenders

Special thanks to: Barbara DelBene for her contribution to content provided in this module.

Some tax laws have expiration dates. Generally the expiration date is December 31 of the applicable tax year.

There have been many instances over the years where Congress has let a law expire and then – often at the last minute – decides to extend the law to cover more tax years.

Laws that have expired but are expected to be extended are called extenders.

Most of the tax issues covered in this module expired December 31, 2017. So they applied to tax year 2017, but not to tax year 2018 and (it appeared) would not apply to tax year 2019.

But, most were recently extended through December 31, 2020. So now these issues are in effect for tax years 2018 and 2019.

All draft forms can be accessed online.

INTRODUCTION TO TAX EXTENDERS

Yes, the tax returns that will be filed beginning January 27, 2020 can take advantage of the newly extended provisions.

Not only that, some taxpayers may benefit from amending their 2018 returns to take advantage of the extended tax benefits.

INTRODUCTION TO TAX EXTENDERS

Before we all go into a full blown panic, know that:

➢The extenders will not affect most VITA taxpayers.

➢SPEC wisely predicted the extender situation and included detailed information about most items in Publication 4012.

➢Additional extender information and updates to Publication 4012 will be included in the forthcoming Publication 4491-X, VITA/TCE Training Supplement.

➢Taxpayers who can benefit from a 2018 amended return (Form1040-X) have until April 15, 2022, to file the amendment.

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INTRODUCTION TO TAX EXTENDERS

Schedule A, Itemized Deductions

The deduction for the mortgage private insurance premium (sometimes referred to as PMI) expense is back.

▪ This means taxpayers who itemize can take a deduction on schedule A for the cost of private mortgage insurance premium related to the taxpayer’s home.

▪ The mortgage insurance premium is reported in Box 5 of Form 1098, Mortgage Interest Statement.

▪A taxpayer must itemize deductions to benefit from this deduction.

SCHEDULE A - ITEMIZED DEDUCTIONS

The medical expense deduction threshold for tax year 2019 was set to be 10% of adjusted gross income (AGI). It has now been lowered back to 7.5% of AGI.

While most extenders expired at the end of 2017, the 7.5% was in effect for tax year 2018. This means that this change will not generate amended returns for tax year 2018.

10% is gone.

7.5% is back!.

SCHEDULE A - ITEMIZED DEDUCTIONS

Example: Nick broke his arm at the skate park last spring and had to pay $3,800 in medical bills that were not covered by his insurance. His AGI for tax year 2019 is $40,000.

old current

total medical expenses $3,800 $3,800

minus AGI threshold $4,000 $3,000

medical deduction $ 0 $ 800

If Nick has sufficient itemized deductions – such as home mortgage interest, real estate taxes, and charitable contributions – that exceed his standard deduction, he can now increase his itemized deductions by $800.

SCHEDULE A - ITEMIZED DEDUCTIONS

Tuition and Fees Deduction

TUITION AND FEES DEDUCTION

The tuition and fees deduction is covered in Publication 4012, page Ext-6.

Here’s the gist of what you need to know.

➢IRS calls it the tuition and fees deduction, but it is actually an adjustment to income. It appears on line 21 of Schedule 1, Additional Income and Adjustments to Income. A taxpayer does not have to itemize deductions to claim this benefit.

➢The adjustment is basically an alternative to education credits. A taxpayer’s tuition and fees expense can be used to claim either an education credit or the tuition and fees deduction. Not both. The taxpayer can choose.

➢Like education credits, a taxpayer does not qualify for the tuition and fees deduction if the taxpayer is using the married filing separately filing status.

➢The adjustment is claimed on Form 8917, Tuition and Fees Deduction.

➢The taxpayer is required to have a Form 1098-T, Tuition Statement. And just like education credits, the information on the form 1098-T may not be sufficient and the preparer probably needs to see the student’s account transcript.

TUITION AND FEES DEDUCTION

The education tax credit issue is already challenging. Adding the tuition and fees deduction makes it just a bit trickier because it is difficult to predict what is better for the taxpayer: an education credit or the tuition and fees deduction.

Here are some guidelines:

➢If the taxpayer qualifies for the American opportunity credit (AOC), that will almost always provide a better outcome than the tuition and fees deduction. That’s mainly because for most taxpayers, part of the AOC is refundable.

➢If the taxpayer does not qualify for the AOC (part-time students, graduate students), but can claim the lifetime learning credit, it is difficult to predict which provides more benefit. It’s better to just try it both ways.

Alert! In some cases, the effects on the state

income tax return must be considered. For some

states, a reduction to federal AGI means a

decreased state income tax liability, If this

applies to your state, remember to review the

effects on the state return.

TUITION AND FEES DEDUCTION

Example: Dan, age 28, lived in Chicago all of 2019. He was a single, part-time graduate student and he cannot be claimed as a dependent. His total income was $11,800 in wages. He paid the following out-of-pocket education expenses:

tuition and fees $ 1,200

textbooks $650

He remembers that his parents used to get a nice education credit when he was an undergrad and he wants to know if he can get that on his 2019 return. He asked if they had it when he had his taxes done last year and they said, “No.” He wants to double check.

TUITION AND FEES DEDUCTION

What to do about Dan? Since he is a part-time student

and already has a degree, he doesn’t qualify for the AOC.

His standard deduction is $12,200, which wipes out his

taxable income. So the lifetime learning credit won’t do

him any good. Since he has no taxable income, an

adjustment won’t help him either – on his federal return.

But Illinois income tax is based on federal AGI. By

claiming the tuition and fess deduction on his federal

return, he reduces his AGI by $1,200. This decreases his

Illinois income tax by $75.

If his situation was similar for tax year 2018, he might

benefit from amending his 2018 federal and state returns

to claim the tuition and fees deduction on his federal

return.

Alert! The effect of the tuition and fees deduction is not the same for all state

returns. Talk to your site coordinator to see how it works in your location.

TUITION AND FEES DEDUCTION

For more complete information, refer to Publication 970, Tax Benefits for

Education.

Publication 970 for tax year 2019 has not yet been issued – presumably

it’s delayed waiting for the extender legislation.

When in doubt, look it up!

Discharge of Qualified Principal Residence Indebtedness

In general, cancelled debt is taxable income and the cancelled debt is reported to the taxpayer on Form 1099-C, Cancellation of Debt.

However, based on recent legislation, most taxpayers can exclude cancelled debt on their principal residence.

Publication 4012 for tax year 2019 includes lots of detailed information about this issue. See pages Ext-1 through Ext-5 in Publication 4012.

Discharge of Qualified Principal Residence Indebtedness

Discharge of Qualified Principal Residence Indebtedness

Hint: The process can be a little confusing.

Discharge of Qualified Principal Residence

Indebtedness is not an adjustment,

deduction, or credit. In fact, the cancelled

debt income does not even appear on the

1040. Form 982, Reduction of Tax

Attributes Due to Discharge of

Indebtedness, is prepared and filed with

the return to explain why the cancelled debt

is not reported on the return.

Residential Energy Credit

RESIDENTIAL ENERGY CREDIT

The residential energy credit, also know as the nonbusiness

energy property credit, is back.

➢ This credit is covered in Publication 4012, page Ext-7.

➢ The credit is nonrefundable and it is claimed on Form 5695,

Residential Energy Credit.

➢ VITA sites may be asked about this, but few taxpayers

qualify.

➢ There is a $500 total combined credit limit for all tax years

after 2005, meaning that a preparer may need to see

copies of prior year returns.

➢ Most volunteers will never prepare a return with this credit.

Summary

SUMMARY

Other issues addressed by recent legislation may affect VITA returns. These

include:

➢ kiddie tax, (Form 8615, Tax for Certain Children Who Have Unearned

Income)

➢ computation of EITC and child tax credit for taxpayers residing in certain

disaster areas

At the time that this module was written, insufficient information was

available to address these issues. Watch the Roundtable listserv, the Tax

Prep Dispatch, and IRS VITA alerts for more information.

SUMMARY

The good news is that the extender legislation relevant to VITA taxpayers will

benefit VITA taxpayers, This includes:

➢ more itemized deductions for medical expenses due to the lower AGI

percentage limit and the addition of deduction for mortgage insurance

premiums

➢ an additional tax benefit related to education expenses – the tuition and

fees deduction option

➢ less taxable income due to the special rules regarding discharge of

qualified principal residence indebtedness

➢ a possible tax credit for certain energy saving home improvements

The bad news is that it complicates tax preparation.

The great news is that VITA is made up of a can-do bunch of folks who can

adjust to just about anything and make it work.

SUMMARY

Thanks for volunteering and

have a great filing season!