Lawmakers Extend the Tax Extenders with the COVID-19 Relief LawTax Planning
Tax extenders are stupid tax law.
Tax extenders exist because lawmakers don’t want to reflect them in the federal deficit outlook. (Extenders avoid the 10-year tax revenue disclosure.)
To avoid making the federal deficit projections look worse than they are, lawmakers use the tax extender technique.
It works like this: If a new law is permanent, you have to consider 10 years. If it’s for one year, you to need to consider only one year.
Example. The ABC tax law costs the government $1 billion a year.
- If it expires in one year, lawmakers consider $1 billion against the deficit projections.
- If it has no expiration date, lawmakers have to count $10 billion as negative revenue.
Business planning for extenders is somewhat tenuous because there’s no guarantee that lawmakers will extend the law for an extra year or years. Worse, sometimes lawmakers allow extenders to expire and reenact them a year after expiration. Imagine planning for that.
Okay, we’re done with the rant. Here’s what lawmakers did with the extenders when they enacted the new COVID-19 relief law on December 27, 2020.
The Big Five
The big five Form 1040 tax breaks that were scheduled to expire on December 31, 2020, were:
- Exclusion from income for cancellation of acquisition debt on your principal residence (up to $2 million)
- Deduction for mortgage insurance premiums as residence interest
- 7.5 percent floor to deduct medical expenses (instead of 10 percent)3
- Above-the-line deduction for tuition and fees4
- Non-business energy property tax credit for energy-efficient improvements to your principal residence
Here is what Congress did with each of these five provisions:
- Cancellation of debt. Extended through tax year 2025, but with a reduced maximum exclusion from $2 million to $750,000 for discharges of indebtedness after December 31, 2020.
- Mortgage insurance premiums. Extended through tax year 2021 only.
- 7.5 percent floor for itemized medical deductions. This provision is now permanent!
- Tuition and fees deduction. Eliminated, but increased the lifetime learning tax credit phase-out limits to $80,000 (or $160,000 on a joint return) to increase access to this tax benefit.
- Principal home energy tax credit. Extended through tax year 2021 only.
Congress bit the bullet on the 10 years and made these tax provisions a permanent part of the tax code:
- Railroad track maintenance credit, with the credit rate reduced from 50 percent to 40 percent in tax years ending after the date of enactment (December 27, 2020)
- Energy-efficient commercial buildings deduction
- Tax-free benefits for certain state and local benefits for volunteer firefighters and first responder
- Reduced excise tax rates for small brewers and distillers as part of the Craft Beverage Modernization Act
Extended to 2021
Congress extended these tax provisions through tax year 2021:
- Credit for electricity produced from certain renewable resources
- Health insurance coverage credit
- Indian employment credit
- Mine rescue team training credit
- Certain racehorses as three-year property
- Accelerated depreciation for business property on Indian reservations
- American Samoa economic development credit
- Second-generation biofuel producer credit
- Qualified fuel cell motor vehicle credit
- Alternative fuel refueling property credit
- 2-wheeled plug-in electric vehicle credit
- Production credit for Indian coal facilities
- Energy-efficient homes credit
- Alternative fuel and alternative fuel and mixture credit
- Black lung disability trust fund excise tax
Extended to 2024 and 2026
Lawmakers extended the date for construction to begin from before January 1, 2022, to January 1, 2024, for the energy property tax credits with one exception.32 Qualified offshore wind facilities have to begin construction before January 1, 2026.
- For residential energy-efficient property, the new law extends the dates as follows:
- For property placed in service after December 31, 2016, and before January 1, 2020, the tax credit is 30 percent.
- For property placed in service after December 31, 2019, and before January 1, 2023, the tax credit is 26 percent.
- For property placed in service after December 31, 2022, and before January 1, 2024, the tax credit is 22 percent.
- After December 31, 2023, the tax credit is no longer (of course, that’s at the moment for this extender).
Extended Through 2025
Lawmakers extended the following tax provisions through tax year 2025:
- Look-through rule for certain controlled foreign corporations
- New Markets Tax Credit
- Work Opportunity Tax Credit
- Seven-year recovery period for motorsports entertainment complexes
- Expensing rules for certain productions
- Oil spill liability trust fund rate
- Empowerment zone tax incentives
- Employer tax credit for paid family and medical leave
- Exclusion for certain employer payments of student loans under the CARES Act43
- Carbon oxide sequestration credit
Important note. The employer tax credit for paid family and medical leave is not the COVID-19 payroll tax credit— it is a different tax credit originally enacted as part of the Tax Cuts and Jobs Act.
The tax law contains tax provisions that lawmakers schedule to expire so as to avoid the 10-year budget baseline.
In an almost annual ritual, lawmakers temporarily extend these tax breaks rather than making them a permanent part of the tax law. Of course, as you already know, there’s nothing lasting in the so-called permanent part of the tax law.
You have to find it ironic that the extenders extensions are found in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 in which lawmakers decided to
- make a few extenders permanent,
- extend some provisions through tax year 2021, and
- extend other provisions to 2023, 2024, and even 2025.
The changes allow you to do longer-term tax planning. But if you look at the history, you simply plan on the extenders being extended. That’s not crazy—scary, yes, but not irrational.