As part of the Appropriations Act of 2020 that was signed into effect at the end of 2019, several tax laws were extended (sometimes called the “extenders”) that had previously expired on December 31, 2017. Three of the more common tax items that were extended include the Nonbusiness Energy Property Tax Credit, the Mortgage Forgiveness Exclusion, and a Mortgage Insurance Premium Deduction. The applicability of these tax items was extended to the 2020 tax year and was made retroactive to December 31, 2017, meaning you can amend your 2018 and 2019 tax returns to include these items. Therefore, it could be in your best interest to see if they apply to you.
The Energy Tax Credit – Nonbusiness Energy Property Tax Credit
This credit applies to certain energy improvements to your principal residence. Qualified energy improvements include items such as installing new exterior windows or doors or home insulation. Residential energy improvement costs include installing certain water heaters, furnaces, and cooling systems. To qualify for the credit, the improvement must meet certain energy efficiency standards and be installed and ready to use prior to the end of the tax year. To document that the improvement qualifies for the credit, you can rely on a certification statement from the manufacturer of the product. For items such as windows, doors, and insulation, you can claim 10% of the cost of the improvement, with a $2,000 lifetime limit for windows. Note that only the actual cost of the product applies to the credit, not the installation cost. Furnaces and cooling systems have set amounts for the credit and the installed cost qualifies. The overall lifetime maximum for the credit is $500 from the inception of the credit in 2006.
One of the easiest ways to see if you qualify is to search for the Tax Certification Statement on the manufacturer’s website, but make sure to reach out to a tax expert for some advice if you still have questions.
Mortgage Forgiveness Tax Break – Qualified Principal Residence Indebtedness
The Mortgage Forgiveness Exclusion, also known as the Qualified Principal Residence Indebtedness (QPRI) Exclusion, allows taxpayers to exclude any forgiven mortgage debt from their income for federal tax purposes. This applies to forgiven mortgage debt that comes as a result of a transaction such as a foreclosure, loan modification, short sale, or deed in lieu of foreclosure on a taxpayer’s principal residence.
This extender is applicable to those who receive a 1099-C form (Cancellation of Debt) from their mortgage lender. If the QPRI exclusion applies, you will not need to report the forgiven principal as income on your tax return. The IRS typically counts any discharged debt as taxable income, so this is a huge financial benefit to anyone who applies this extender to their taxes. So, if you filed a 2018 or 2019 tax return including income due to a mortgage foreclosure on your principal residence, amending your return might make sense.
Mortgage Insurance Premium Deduction
The final extender we will be talking about here is the Mortgage Insurance Premium Deduction. This allows taxpayers to deduct the cost of premiums for mortgage insurance (PMI) on a qualified personal residence as home mortgage interest. This deduction was previously in effect from 2007 to 2017.
There are a number of qualifying factors that are taken into account when looking at this particular extender. Some of the main requirements are the following…
- It must be for the taxpayer’s first and/or second home(s).
- If your adjusted gross income is above $100,000, or $50,000 for the married filing separately status, the deduction is reduced or eliminated.
- PMI must have been paid in connection to debt incurred to buy, build, or improve a home (otherwise known as acquisition debt). Acquisition debt includes acquisition debt that was refinanced but not any amount of the refinance total not classified as acquisition debt, nor does it include home equity debt.
It’s clear these tax extenders may be able to save taxpayers a significant amount of money on their taxes. If you think you might qualify for one or all of these tax extenders and want to know more, reach out to our team here!