Temporary Individual Tax Provisions (“Tax
April 26, 2021
Extenders”)
Molly F. Sherlock,
Nine temporary individual income tax provisions that expired in 2020 were extended or made
Coordinator
permanent by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division
Specialist in Public Finance
EE of the Consolidated Appropriations Act, 2021 (P.L. 116-260). The law repealed an additional
provision, while modifying a related permanent provision. In the past, Congress has regularly
Jane G. Gravelle,
acted to extend expired or expiring temporary tax provisions. These provisions are often referred
Coordinator
to as “tax extenders.” A summary of the changes made by P.L. 116-260 is provided below.
Senior Specialist in
Economic Policy
Extended through the end of 2021
Two provisions that had been extended in the past were extended through 2021:
Mark P. Keightley
the mortgage insurance premium deduction; and
Specialist in Economics
the health coverage tax credit.
Sean Lowry
Three provisions enacted initially in the Coronavirus Aid, Relief, and Economic Security
Analyst in Public Finance
(CARES) Act (P.L. 116-136) for 2020 were extended through 2021:
the charitable deduction for nonitemizers;
Grant A. Driessen
the increased income limit for charitable deductions for itemizers; and
Specialist in Public Finance
flexible spending account rollovers, a midterm election, and other flexibilities.
Extended through the end of 2025
Two provisions were extended through 2025:
the exclusion for employer payments of student loans; and
the tax exclusion for canceled mortgage debt.
The student loan provision was enacted in the CARES Act.
Permanent Changes
Two provisions were made permanent:
the 7.5% floor for the medical expense deduction; and
benefits for volunteer firefighters and emergency medical responders.
One provision was repealed, but modifications were made in a related provision to benefit those individuals:
the above-the-line deduction for qualified tuition and related expenses was repealed, while the income phaseout level for an
education tax credit was increased.
This report provides background information on individual income tax provisions that were extended, made permanent, or
replaced by the Consolidated Appropriations Act, 2021. For other reports related to extenders, see
CRS Report R46627,
Tax Provisions Expiring in 2020 (“Tax Extenders”), by Molly F. Sherlock;
CRS Report R46451,
Energy Tax Provisions Expiring in 2020, 2021, 2022, and 2023 (“Tax Extenders”),
by Molly F. Sherlock, Margot L. Crandall-Hollick, and Donald J. Marples; and
CRS Report R46271,
Business Tax Provisions Expiring in 2020, 2021, and 2022 (“Tax Extenders”),
coordinated by Molly F. Sherlock.
Congressional Research Service
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Temporary Individual Tax Provisions (“Tax Extenders”)
Contents
Introduction ................................................................................................................... 1
Individual “Tax Extender” Provisions Expiring in 2021 ........................................................ 2
Mortgage Insurance Premium Deductibility ................................................................... 2
Credit for Health Insurance Costs of Eligible Individuals ................................................. 4
CARES Act and COVID-Related Provisions Expiring in 2021 ............................................... 5
Charitable Contributions Deductible by Nonitemizers ..................................................... 5
Increased Limits to Charitable Contributions ................................................................. 5
Flexible Spending Accounts Rollover ........................................................................... 6
Individual CARES Act and “Tax Extender” Provisions Expiring in 2025 ................................. 7
Exclusion for Employer Payments of Student Loans ....................................................... 7
Tax Exclusion for Canceled Mortgage Debt ................................................................... 8
Individual “Tax Extender” Provisions Made Permanent in P.L. 116-230 .................................. 9
Medical Expense Deduction Adjusted Gross Income (AGI) Floor of 7.5% ......................... 9
Benefits for Volunteer Firefighters and Emergency Medical Responders .......................... 11
Provision Repealed and Replaced .................................................................................... 11
Above-the-Line Deduction for Qualified Tuition and Related Expenses: Repealed and
Replaced With Higher Phaseout for Credit ................................................................ 11
Above-the-Line Deduction .................................................................................. 11
The Lifetime Learning Credit ............................................................................... 12
Tables
Table 1. Estimated Cost of Temporary Individual Provisions in P.L. 116-260............................ 2
Contacts
Author Information ....................................................................................................... 13
Congressional Research Service
link to page 5
Temporary Individual Tax Provisions (“Tax Extenders”)
Introduction
Historical y, Congress has regularly acted to extend expired or expiring temporary tax
provisions.1 Collectively, these temporary tax provisions are often referred to as “tax extenders.”
There are 25 temporary tax provisions, both individual and business, scheduled to expire at the
end of 2021, with additional provisions scheduled to expire in the following years. This report
discusses expiring
individual income tax provisions, including expiring provisions that were made
permanent in the most recent tax extenders legislation, the Taxpayer Certainty and Disaster Tax
Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021 (P.L.
116-260).
Five provisions discussed in this report expire at the end of 2021. Two of these provisions have
been extended in the past as part of the tax extenders: (1) the deduction for mortgage insurance
premiums; and (2) the tax credit for health insurance costs. Three provisions that were first
enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) and
original y scheduled to expire in 2020 have been extended through 2021: (1) the charitable
deduction for nonitemizers; (2) increases in the income limits for deducting charitable
contributions (for itemizers); and (3) the ability to roll over amounts in flexible spending accounts
to the next year.
Other provisions are scheduled to expire in 2025.2 One is the exclusion for canceled mortgage
debt, which has been extended as part of past tax extenders legislation. The exclusion for certain
employer payments for student loans, enacted in the CARES Act for 2020, was also extended
through 2025.
Other temporary provisions were made permanent in P.L. 116-260: (1) the medical expense
deduction adjusted gross income (AGI) floor of 7.5%; and (2) the exclusion for income of certain
state and local tax rebates and reimbursement for volunteer firefighters and emergency medical
responders. The above-the-line deduction for qualified tuition and related expenses, a provision
that was extended in the past as a tax extender, was repealed in concert with an increase in the
income limits for phasing out the Lifetime Learning credit (LLC) for higher education.
The estimated cost of the extensions, conversion to permanent provisions, or repeal and revisions
in related provisions enacted in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (P.L.
116-260) is provided in
Table 1.
1 For an overview of tax extenders, see CRS Report R46627,
Tax Provisions Expiring in 2020 (“Tax Extenders”), by
Molly F. Sherlock.
2 T his report discusses provisions that were part of previous tax extenders legislation, as well temporary provisions that
were included in the CARES Act and subsequently extended. T he report does not include the many temporary
modifications to the individual income tax system, made as part of the 2017 tax revision (the “Tax Cuts and Jobs Act;”
P.L. 115-97), that are scheduled to expire in 2025. For additional information, see CRS Report R45092,
The 2017 Tax
Revision (P.L. 115-97): Com parison to 2017 Tax Law, coordinated by Molly F. Sherlock and Donald J. Marples.
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Temporary Individual Tax Provisions (“Tax Extenders”)
Table 1. Estimated Cost of Temporary Individual Provisions in P.L. 116-260
(bil ions of dol ars)
Cost of Extension
Provision
Length of Extension
in P.L. 116-260
Mortgage Insurance Premium Deductibility
1 year
$0.2
expires 12/31/2021
Health Coverage Tax Credit
1 year
(*)
expires 12/31/2021
Certain Charitable Contributions Deductible for
1 year
$2.9
Nonitemizers
expires 12/31/2021
Increase in Limits on Charitable Contributions
1 year
$0.6
expires 12/31/2021
Flexible Spending Accounts Rol over
effective for 2020 and
$0.1
2021 amounts
Exclusion for Employer Payments for Student Loans
5 years
$3.4
expires 12/31/2025
Tax Exclusion for Canceled Mortgage Debt
5 years
$2.8
expires 12/31/2025
Medical Expense Deduction Adjusted Gross Income Floor of
permanent
$32.9
7.5%
Benefits for Volunteer Firefighters and Emergency Medical
permanent
$0.7
Responders
Repeal of Above-the-Line Deduction for Qualified Tuition
substantial modification;
$5.9
and Related Expenses and increases in Credit Income
permanent
Phaseouts
Source: Joint Committee on Taxation,
Estimated Budget Effects of the Revenue Provisions Contained in Rules
Committee Print 116-68, The “Consolidated Appropriations Act, 2021,” December 21, 2020, JCX-24-20.
Notes: (*) is less than $50 mil ion. The cost estimates are estimated reductions in revenue over a 10-year
budget period (FY2021-FY2030).
Individual “Tax Extender” Provisions Expiring in
2021
Mortgage Insurance Premium Deductibility3
Traditional y, homeowners who itemize their tax deductions have been able to deduct the interest
paid on their mortgages, as wel as any property taxes they pay. Beginning in 2007, homeowners
could also deduct qualifying mortgage insurance premiums as a result of changes made to the
provision included in the Tax Relief and Health Care Act of 2006 (P.L. 109-432). Specifical y,
homeowners could effectively treat qualifying mortgage insurance premiums as mortgage
interest, thus making the premiums deductible if the homeowner itemized, and if the
homeowner’s adjusted gross income was below a certain threshold ($55,000 for single, and
$110,000 for married filing jointly). Original y, the deduction was only to be available for 2007,
3 Section 163(h)(3)(E) of the Internal Revenue Code.
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Temporary Individual Tax Provisions (“Tax Extenders”)
but it was extended several times. The deduction was extended through December 31, 2021, in
the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the
Consolidated Appropriations Act, 2021 (P.L. 116-260).
Taxpayers of al ages may be less likely to claim the mortgage insurance premium deduction
compared to prior periods because of other provisions of the 2017 tax revision, popularly known
as the Tax Cuts and Jobs Act (TCJA; P.L. 115-97). Specifical y the law included a higher
standard deduction (in part as a trade-off for the elimination of personal exemptions) and a cap on
the deduction of state and local taxes. These changes contributed to an expected reduction in the
number of itemizers from about one-third of individual income tax returns to one-eighth (12%).4
A justification for the deduction of mortgage insurance premiums is that it helps to promote
homeownership and, relatedly, the recovery of the housing market following the December 2007-
June 2009 Great Recession. Homeownership is often argued to bestow certain benefits to society,
such as higher property values, lower crime, and higher civic participation. Homeownership may
also promote a more even distribution of income and wealth, as wel as establish greater
individual financial security. Furthermore, homeownership may have a positive effect on living
conditions, which can lead to a healthier population.
With regard to the first justification, it is not clear that the deduction for mortgage insurance
premiums affects the homeownership rate. Economists have identified the high transaction costs
associated with a home purchase—mostly resulting from the down payment requirement, but also
from closing costs—as the primary barrier to homeownership.5 The ability to deduct insurance
premiums does not lower this barrier—most lenders wil require mortgage insurance if the
borrower’s down payment is less than 20% regardless of whether the premiums are deductible.
The deduction may al ow buyers to borrow more, however, because they can deduct the higher
associated premiums and therefore afford a higher housing payment.
Concerning the second justification, it is also not clear that the deduction for mortgage insurance
premiums is stil needed to assist in the housing market’s recovery. Based on the S&P CoreLogic
Case-Shil er U.S. National Composite Index, home prices have general y increased since the
bottom of the market following the Great Recession.6 In addition, the available housing inventory
is now slightly below its historical level.7 Both of these indicators suggest that the market is
stronger than when the provision was enacted.
Economists have noted that owner-occupied housing is already heavily subsidized via tax and
nontax programs. To the degree that owner-occupied housing is oversubsidized, it could be
4 T he 12% estimate for 2021 is from Joint Committee on T axation
, Overview of the Federal Tax system as In Effect for
2021, JCX-18-21, April 15, 2021, https://www.jct.gov/publications/2021/jcx-18-21/.
5 See for example, Peter D. Linneman and Susan M. Wachter, “T he Impacts of Borrowing Constraints,”
Journal of the
Am erican Real Estate and Urban Econom ics Association , vol. 17, no. 4 (Winter 1989), pp. 389 -402; Donald R. Haurin,
Patrick H. Hendershott, and Susan M. Wachter, “Borrowing Constraints and the T enure Choice of Young Households,”
Journal of Housing Research, vol. 8, no. 2 (1997), pp. 137-154; and Mathew Chambers, Carlos Garriga, and Donald
Schlagenhauf, “ Accounting for Changes in the Homeownership Rate,”
International Econom ic Review, vol. 50, no. 3
(August 2009), pp. 677-726.
6 S&P Dow Jones Indices, S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, retrieved from FRED,
Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/CSUSHPINSA, February 25, 2020.
7 U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, “Monthly Supply of Houses in
the United States,” retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/
MSACSR.
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argued that extending the deduction for mortgage insurance premiums would lead to a greater
misal ocation of resources that are directed toward the housing industry.
Credit for Health Insurance Costs of Eligible Individuals8
The credit for health insurance costs of eligible individuals, commonly known as the health
coverage tax credit (HCTC), reduces the cost of qualified health insurance for eligible
individuals.9 To be eligible to claim the HCTC, taxpayers must be (1) an eligible trade adjustment
assistance (TAA) recipient,10 or (2) an eligible Pension Benefit Guaranty Corporation (PBGC)
pension recipient.11 Additional y, an individual is not eligible for the HCTC if they have access to
“other specified coverage,” which includes coverage for which an employer (or former employer)
incurs 50% of the cost, as wel as Medicare, Medicaid, the Children’s Health Insurance Program,
and other federal and military health or medical benefit plans.
Under this provision, eligible taxpayers are al owed a refundable tax credit for 72.5% of the
premiums they pay for qualified health insurance for themselves and their family members.
Eligible taxpayers with qualified health insurance may claim the tax credit (1) when tax returns
are filed; or (2) as advance payments, on a monthly basis, throughout the year. This latter option
helps taxpayers pay for health plan premiums as they become due. The credit is not available for
months beginning on or after January 1, 2021.
The HCTC was original y authorized by the Trade Act of 2002 (P.L. 107-210). The credit has
been extended and modified several times. Extensions or modifications have been made in trade
adjustment assistance legislation as wel as tax extenders legislation. The Trade Preferences
Extension Act of 2015 (P.L. 114-27) extended the HCTC through December 31, 2019, and also
made changes to address the interaction between the HCTC and the premium tax credit
established under the Patient Protection and Affordable Care Act (P.L. 111-148, as amended).12
The credit was extended through December 31, 2020, in the Taxpayer Certainty and Disaster Tax
Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020
(P.L. 116-94). It was extended through December 31, 2021, by the Taxpayer Certainty and
Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act,
2021 (P.L. 116-260).
Some evidence suggests that the credit has not reached many of the individuals it was designed to
help. The credit also provides the same benefit regardless of the eligible individual’s income
status, therefore providing benefits regardless of ability to pay, but not benefitting others who
have experienced economic dislocations beyond their control. The credit’s refundability,
however, makes it available to the lowest-income individuals.13
8 Section 35 of the Internal Revenue Code.
9 For additional information on this provision, see CRS Report R44392,
The Health Coverage Tax Credit (HCTC): In
Brief, by Bernadette Fernandez.
10 For more information, see CRS Report R44153,
Trade Adjustment Assistance for Workers and the TAA
Reauthorization Act of 2015, by Benjamin Collins.
11 For more informat ion, see CRS Report 95-118,
Pension Benefit Guaranty Corporation (PBGC): A Primer, by John
J. T opoleski.
12 For more information, see CRS Report R44425,
Health Insurance Premium Tax Credit and Cost-Sharing
Reductions, by Bernadette Fernandez.
13 For more information, see United States Senate, Committee on the Budget,
Tax Expenditures: Compendium of
Background Material on Individual Provisions, 116th Congress, 2nd Session, S.Prt. 116-53, December 2020, pp. 863-
869, at https://www.congress.gov/committee-print/116th-congress/senate-committee-print/42597?s=1&r=42.
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Temporary Individual Tax Provisions (“Tax Extenders”)
CARES Act and COVID-Related Provisions
Expiring in 2021
Charitable Contributions Deductible by Nonitemizers14
The deduction for charitable contributions is one of an array of tax benefits for charitable giving
and tax-exempt organizations.15 Individuals may take a charitable deduction if they itemize
deductions on their tax returns. The Coronavirus Aid, Relief, and Economic Security (CARES)
Act (P.L. 116-136) provided for a deduction for cash donations for nonitemizers of up to $300
through December 31, 2020. That is, taxpayers can deduct these amounts even if they elect the
standard deduction. This provision was extended through December 31, 2021, by the Taxpayer
Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated
Appropriations Act, 2021 (P.L. 116-260).
The $300 nonitemizer deduction is likely to have a limited effect on charitable contributions
because of its relatively small cap. One study estimated that the induced charitable giving from
the nonitemizer deduction would be $100 million, a relatively negligible effect, because most
taxpayers who donate are already contributing amounts in excess of $300.16
Increased Limits to Charitable Contributions17
Prior to the TCJA (P.L. 115-97), the limit on charitable deductions for individuals was 50% of
adjusted gross income for gifts (other than gifts of appreciated property) to public charities.18
(The limit was 30% for gifts of appreciated property, 30% for ordinary gifts to private
foundations, and 20% for gifts of appreciated property to private foundations.) The TCJA
increased the 50% limit to 60% through 2025 for cash contributions. The TCJA also made
unrelated changes through 2025 (i.e., an increased standard deduction and limits on other
itemized deductions) that made itemized deductions less attractive and reduced the share of
taxpayers with a deduction for charitable contributions from an estimated 25% to 10%.19 (Note
that not al itemizers report charitable deductions, so the share of taxpayers itemizing charitable
contributions is smal er than the share of itemizers in general.)
The corporate charitable deduction is limited to 10% of taxable income. Corporations (and
individuals, in some instances) are also allowed special deductions for contributions of inventory.
Normally, charitable inventory contributions are limited to the lesser of basis (cost) or fair market
value, with inventory reduced by the contributions (as a result of this limitation, any inventory
cost that is in excess of fair market value can still be deducted in calculating taxable income as
the cost of goods sold). For C corporations contributing inventory to 501(c)(3) organizations for
14 Section 170(p) of the Internal Revenue Code.
15 See CRS Report R45922,
Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle,
Donald J. Marples, and Molly F. Sherlock for further discussion.
16 “New Charitable Deduction in the CARES Act, Budgetary and Distributional Analysis,” blog post, T ax Policy
Center, Penn-Wharton Budget Model, March 27, 2020, https://budgetmodel.wharton.upenn.edu/issues/2020/3/27/
charitable-deduction-the-cares-act.
17 Section 170(b)(c) and (d) of the Internal Revenue Code.
18 See CRS Report R45922,
Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle,
Donald J. Marples, and Molly F. Sherlock for further discussion.
19 T he 10% estimate for 2021 is from Joint Committee on T axation
, Overview of the Federal Tax system as In Effect for
2021, JCX-18-21, April 15, 2021, https://www.jct.gov/publications/2021/jcx-18-21/.
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the care of the ill, the needy, or infants, special rules provide an enhanced deduction equal to the
basis plus half the difference between the fair market value and basis, not to exceed twice the
basis. A similar enhanced deduction exists for businesses (both corporate and noncorporate) for
food inventory contributions for the care of the ill, needy, and infants. Cash basis taxpayers who
do not keep inventories (including many farmers and some other small businesses) are allowed to
deduct half the fair market value under the enhanced food inventory deduction, even though they
already deduct these costs as a business expense. This enhanced deduction for food inventory is
limited to 15% of taxable income from the business for both individuals and corporations.
Unused charitable deductions that exceed the income limits can be carried forward and deducted
in the following five years.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) eliminated the
limit on cash gifts of individuals to public charities (but not to donor advised funds, supporting
organizations, or private foundations). It increased the limit on charitable contributions from
corporations to 25% of taxable income (including donations of qualified food inventory). The
deduction for contributions of qualified food inventory for individuals was also increased to 25%.
This provision was extended through December 31, 2021, by the Taxpayer Certainty and Disaster
Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021
(P.L. 116-260).
Lifting caps on the deductions for both individuals and businesses can provide an incentive for
additional charitable giving. Evidence on the response of charitable giving by individuals has
been widely studied with mixed results. A review of this evidence suggests that an enhanced
charitable deduction is likely to increase charitable giving by less than the associated revenue
loss.20 Lifting the limits affects a relatively small share of charitable giving, and the revenue
pattern suggests that much of the initial revenue loss (77%) can be attributed to an accelerated
realization of carryovers.21 With charitable giving estimated at $427.4 billion in 2018, if all of the
permanent revenue loss led to an increase in charitable giving by the same amount (i.e.,
approximately $1 billion), additional giving would be 0.3% of expected giving prior to the current
economic slowdown.22
Flexible Spending Accounts Rollover23
Flexible spending accounts (FSAs) allow employees whose employers offer these benefits to pay
for certain health and dependent care using pretax dollars (i.e., not subject to income or payroll
taxes).24 Contributions to FSAs are limited to $2,750 for health care FSAs and $5,000 for
20 See the review of the empirical evidence in CRS Report R45922,
Tax Issues Relating to Charitable Contributions
and Organizations, by Jane G. Gravelle, Donald J. Marples, and Molly F. Sherlock .
21 According to the revenue estimates for the CARES Act, the initial revenue loss in the first two years was $4,828
million, followed by a gain of $3,535 million, indicating that 77% ($3,535 divided by $4,828) of the revenue loss was
temporary and likely due to carryovers of prior unused deductions. See Joint Committee on T axation,
Estim ated
Revenue Effects Of The Revenue Provisions Contained In An Am endm ent In The Nature Of A Substitute To H.R. 748,
The “Coronavirus Aid, Relief, And Econom ic Security (‘CARES’) Act,” As Passed By The Senate On March 25, 2020,
And Scheduled For Consideration By The House Of Representatives On March 27, 2020 , JCX-11R-20, April 23, 2020,
at https://www.jct.gov/publications/2020/jcx-11r-20/.
22 $1.1 billion divided by $427.4 billion = 0.3%.
23 Sections 125 and 129 of the Internal Revenue Code.
24 See CRS In Focus IF11576,
Potential COVID-19 Impacts on Health Flexible Spending Arrangements (FSAs) and
Recent Health FSA Changes, by Ryan J. Rosso; CRS In Focus IF11597,
Potential Im pact of COVID-19 on Dependent
Care Flexible Spending Arrangem ents (FSAs), by Conor F. Boyle and Margot L. Crandall-Hollick; and CRS Report
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dependent care FSAs for 2020. For 2021, this amount is raised to $10,500. Individuals may have
both types of accounts.
Employees’ contributions are generally forfeited if not used during the plan year (or, where
applicable, an allowed grace period of 2.5 months). Employers may allow $500 of health FSAs to
be rolled over to subsequent plan years as an alternative to the grace period. These accounts are
allowed as part of a cafeteria plan. The “use-or-lose” rule ensures that a cafeteria plan is not used
to defer compensation (and the taxes paid on that compensation) to a future date, which is
general y prohibited under IRC Section 125.
The Internal Revenue Service (IRS) allowed employers to provide employees with the ability to
make midyear changes to the amounts contributed to FSAs during 2020. Because some plans do
not follow a calendar year, the IRS also allowed employers to extend the availability of FSA
funds through the end of 2020 for plans that were scheduled to end before December 31. This
extension reflected the difficulty in using funds due to COVID-19 shutdowns and social
distancing, which made use of child and dependent care and health services difficult.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the
Consolidated Appropriations Act, 2021 (P.L. 116-260), allows employers to extend the
availability of FSA contribution amounts from 2020 to 2021, and from 2021 to 2022. It also
allows employers to increase the coverage of dependent care expenses from children under age 13
to children under age 14. Additionally, it allows employers to make health FSA funds available to
employees who made contributions to their health FSA and were terminated in 2020 or 2021.
Finally, it allows employers to provide employees with the opportunity to make midyear,
prospective FSA contribution changes for plans ending in 2021.
In general, health FSA funds can be used to pay for an employee’s share of health insurance
premiums, including cases where the employee pays the entire premium. However, insurance
bought through the individual exchanges established under the Affordable Care Act (ACA; P.L.
111-148, as amended) is not eligible for tax benefits under cafeteria plans.
Individual CARES Act and “Tax Extender”
Provisions Expiring in 2025
Exclusion for Employer Payments of Student Loans25
An individual may not have to pay income or payroll taxes on up to $5,250 of educational
assistance provided by their employer. Specifical y, an individual may be able exclude from their
gross income up to $5,250 annual y of educational assistance for both graduate and undergraduate
education provided by their employer under an education assistance program. The temporary
provision provides that educational assistance includes certain student loan payments.
There are three main requirements that must be satisfied in order for employer-provided
educational assistance to be excludable from gross income and hence tax-free. First, the
educational assistance must be provided pursuant to a written qualified educational assistance
program. Second, the plan may not discriminate in favor of highly compensated employees.
Third, no more than 5% of the total amount paid out during the year may be paid to or for
R44993,
Child and Dependent Care Tax Benefits: How They Work and Who Receives Them , by Margot L. Crandall-
Hollick and Conor F. Boyle for further discussion.
25 Section 127 of the Internal Revenue Code.
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employees who are shareholders or owners of at least 5% or more of the business. (The employer
must maintain records and file a plan return.)
The employer may make qualified assistance payments directly, by reimbursement to the
employee, or may directly provide the education. (The exclusion only applies to the employee
and not their spouses or dependents.)
Qualifying assistance payments general y include, but are not limited to, tuition, fees, and similar
payments; books; supplies; and equipment. Courses do not have to be job related. Qualifying
assistance payments do not include amounts for tools or supplies that can be kept by the
employee or amounts for meals, lodging, or transportation. Qualified education assistance does
not include payment for any course or other education involving sports, games, or hobbies.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) temporarily
expanded the definition of employer-sponsored educational assistance to include qualified student
loan payments made to employees in 2020. Payments can cover both the principal and interest of
a qualified student loan. Qualified student loans are those eligible for the student loan interest
deduction26 that are incurred by the employer for the employee’s education. This provision
applies to any student loan payment made by an employer on an employee’s behalf after the date
of enactment of the CARES Act (March 27, 2020) and before January 1, 2021. The Taxpayer
Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated
Appropriations Act, 2021 (P.L. 116-260), allows these payments to be excluded if made before
January 1, 2026.
This provision provides benefits to those who are working and receiving employer assistance
with their student loans. These individuals may have experienced wage reductions, slower wage
growth, and reduced hours during the pandemic. They may also be more likely to spend
additional income, resulting in economic stimulus. In the longer run, advocates have proposed
allowing tax benefits for employer repayment of student loans as an employee retention or
recruitment incentive.
Tax Exclusion for Canceled Mortgage Debt27
Historical y, when al or part of a taxpayer’s mortgage debt has been forgiven, the amount
canceled has been included in the taxpayer’s gross income.28 This income is typical y referred to
as canceled mortgage debt income. Canceled (or forgiven) mortgage debt is common with a short
sale, in which a homeowner agrees to sel a house and transfer the proceeds to the lender in
exchange for the lender relieving the homeowner from repaying any debt in excess of the sale
proceeds. For example, in a short sale, a homeowner with a $300,000 mortgage may be able to
sel the house for $250,000. The lender would receive the $250,000 from the home sale and
forgive the remaining $50,000 in mortgage debt.29 Lenders report the canceled debt to the Internal
Revenue Service (IRS) using Form 1099-C. A copy of the 1099-C is also sent to the borrower,
who in general must include the amount listed in his or her gross income in the year of discharge.
26 Section 221(d)(1) of the Internal Revenue Code.
27 Section 108(a)(1)(E) of the Internal Revenue Code.
28 Generally, any type of debt that has been canceled is to be included in a taxpayer’s gross income. Several permanent
exceptions to this general tax treatment of canceled debt exist. T hey are discussed in CRS Report RL34212,
Analysis of
the Tax Exclusion for Canceled Mortgage Debt Incom e, by Mark P. Keightley and Erika K. Lunder.
29 A lender must agree to a short sale prior to a borrower selling a house, or the borrower will still be obligated to repay
the balance remaining on the mortgage.
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To understand why forgiven debt has historical y been taxable, it may be helpful to explain why it
is viewed as income from an economic perspective. Income is a measure of the increase in an
individual’s purchasing power over a designated period of time. When individuals experience a
reduction in their debts, their purchasing power has increased (because they no longer have to
make debt payments). Effectively, their disposable income has increased. From an economic
standpoint, it is irrelevant whether a person’s debt was reduced via a direct transfer of money to
the borrower (e.g., wage income) that was then used to pay down the debt, or whether it was
reduced because the lender forgave a portion of the outstanding balance. Both have the same
effect, and thus both are subject to taxation.
The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142), signed into law on December
20, 2007, temporarily excluded qualified canceled mortgage debt income that is associated with a
primary residence from taxation. Thus, the act al owed taxpayers who did not qualify for one of
several existing exceptions to exclude canceled mortgage debt from gross income. The provision
was original y effective for debt discharged before January 1, 2010. Since then, the provision has
regularly been extended as part of the tax extenders. The exclusion was extended through
December 31, 2020, in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as
Division Q of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94). It was further
extended through December 31, 2025, in the Taxpayer Certainty and Disaster Tax Relief Act of
2020, enacted as Division EE of the Consolidated Appropriations Act, 2021 (P.L. 116-260).
The rationales for extending the exclusion are to minimize hardship for households in distress and
lessen the risk that nontax homeowner retention efforts are thwarted by tax policy. The
exclusion’s supporters may also argue that extending the exclusion would continue to assist the
recoveries of the housing market and overal economy. The exclusion’s opponents may argue that
extending the provision would make debt forgiveness more attractive for homeowners, which
could encourage homeowners to be less responsible about fulfil ing debt obligations. Some may
also view the exclusion as unfair because its benefits depend on whether a homeowner is able to
negotiate a debt cancelation, the taxpayer’s income tax bracket, and whether the taxpayer retains
ownership of the house following the debt cancel ation.
Individual “Tax Extender” Provisions Made
Permanent in P.L. 116-230
Medical Expense Deduction Adjusted Gross Income (AGI) Floor of
7.5%30
Individuals are al owed to deduct unreimbursed medical expenses above a specific income
threshold if they itemize their deductions. Prior to 2013, these deductions were al owed only for
amounts in excess of 7.5% of income. Expenses reimbursed by an employer or insurance
company are not eligible for deduction.
The Affordable Care Act (P.L. 111-148, as amended) increased the floor for individuals claiming
the itemized deduction for medical expenses from 7.5% to 10% of adjusted gross income (AGI).31
30 Section 213(f) of the Internal Revenue Code.
31 T axpayers first were allowed to deduct health care expenses above a specific income threshold in 1942. T he
deduction was a provision of the Revenue Act of 1942 (P.L. 77 -753). In adopting such a rule, Congress was trying to
encourage improved public health standards and ease the burden of high tax rates during World War II. Congress has
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The higher floor went into effect for taxpayers under age 65 beginning for the 2013 tax year.
Individuals 65 or older, however, were stil able to claim the deduction under the lower, 7.5%
floor for tax years 2013 through 2016. The 2017 tax revision (TCJA; P.L. 115-97) temporarily
al owed al taxpayers (not just those aged 65 or older) to claim the deduction subject to the 7.5%
floor for the 2017-2018 tax years. The Taxpayer Certainty and Disaster Tax Relief Act of 2019,
enacted as Division Q of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94),
extended the 7.5% floor for al taxpayers through 2020. After 2020, under current law, the floor
was scheduled to increase to 10% of AGI for al taxpayers. The lower 7.5% floor was made
permanent in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE
of the Consolidated Appropriations Act, 2021 (P.L. 116-260).
A complicated set of rules governs the expenses eligible for the deduction.32 General y, these
expenses include amounts paid by the taxpayer on behalf of himself or herself, his or her spouse,
and eligible dependents for the following purposes: (1) health insurance premiums (including
employee payments for employer-sponsored health plans, Medicare Part B premiums, and other
self-paid premiums); (2) diagnosis, treatment, mitigation, or prevention of disease, or for the
purpose of affecting any structure or function of the body, including dental care; (3) prescription
drugs and insulin (but not over-the-counter medicines); (4) transportation primarily for and
essential to medical care; and (5) lodging away from home primarily for and essential to medical
care, up to $50 per night for each individual.33
Taxpayers may be less likely to claim the medical expense deduction compared to prior periods
because other provisions of the 2017 tax revision (TCJA; P.L. 115-97) reduced the tax benefits of
itemizing deductions.34 These provisions, while currently in effect, are slated to expire after 2025.
The likelihood of itemizing general y increases with income. However, the AGI floor for the
medical expenses deduction reduces the likelihood that very high-income individuals would
claim the deduction.35 For al taxpayers, medical expenses alone might not make it worthwhile to
itemize unless they can also claim other itemized deductions (e.g., home mortgage interest or
state and local taxes).
modified the deduction a number of times, typically by either raising or lowering the AGI floor, or establishing or
adjusting additional floors for various subcategories of medical spen ding within the deduction. For more information,
see pp. 887-884 in United States Senate, Committee on the Budget,
Tax Expenditures: Com pendium of Background
Material on Individual Provisions, 116th Congress, 2nd Session, S.Prt. 116-53, December 2020,
https://www.congress.gov/committee-print/116th-congress/senate-committee-print/42597?s=1&r=42.
32 United States Senate, Committee on the Budget,
Tax Expenditures: Compendium of Background Material on
Individual Provisions, 116th Congress, 2nd Session, S.Prt. 116-53, December 2020, https://www.congress.gov/
committee-print/116th-congress/senate-committee-print/42597?s=1&r=42.
33 For more information, see IRS Publication 502, “Medical and Dental Expenses,” https://www.irs.gov/publications/
p502/index.html.
34 After the 2017 tax revision, the share of taxpayers who itemized was estimated to be 12%. T he 12% estimate for
2021 is from Joint Committee on T axation
, Overview of the Federal Tax system as In Effect for 20 21, JCX-18-21, April
15, 2021, https://www.jct.gov/publications/2021/jcx-18-21/.
35 In general, a larger percentage of the tax returns from the medical expense deduction goes to taxpayers in the lower-
to middle-income brackets, relative to other common itemized deductions. Lower -income taxpayers have relatively low
rates of health insurance coverage because they cannot afford health insurance coverage or coverage is not offered by
their employers. As a result, many of these taxpayers are forced to pay out -of-pocket for the health care they and their
immediate families receive. In addition, medical spending constitutes a larger fraction of household budgets among
low-income taxpayers than it does among high-income taxpayers, making it easier for low-income taxpayers to exceed
the AGI threshold. See United States Senate, Committee on the Budget,
Tax Expenditures: Com pendium of
Background Material on Individual Provisions, 116th Congress, 2nd Session, S.Prt. 116-53, December 2020,
https://www.congress.gov/committee-print/116th-congress/senate-committee-print/42597?s=1&r=42.
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Benefits for Volunteer Firefighters and Emergency Medical
Responders36
The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142) provided an exclusion from
gross income of certain benefits for members of qualified voluntary emergency response
organizations. These payments include the forgiveness or rebate of state and local income and
property taxes or payments by states or their political subdivisions to reimburse for expenses. The
exclusion was limited to $30 a month. The provision disal owed any itemized deductions for the
state and local taxes otherwise excluded. The provision was temporary, effective from the date of
enactment (December 20, 2007) through 2010. The provision was al owed to expire as scheduled.
This provision was enacted after a 2002 IRS decision that a reduction in property taxes for
volunteers who are emergency responders was includible in gross income.37
The SECURE Act of 2019, enacted as Division O of the Further Consolidated Appropriations
Act, 2020 (P.L. 116-94), reinstated the provision for 2020 and increased the amount to $50 a
month. The provision was made permanent in the Taxpayer Certainty and Disaster Tax Relief Act
of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021 (P.L. 116-260).
The reinstated provision is likely to have a wider scope than it previously did because of the
reduction in the number of itemizers due to provisions in the TCJA (P.L. 115-97), which is
expected to reduce the share of taxpayers who itemize deductions.
Provision Repealed and Replaced
Above-the-Line Deduction for Qualified Tuition and Related
Expenses: Repealed and Replaced With Higher Phaseout for
Credit38
The above-the-line deduction for qualified tuition and related expenses was repealed and the
income limits for the Lifetime Learning Credit (LLC) were increased to make that credit available
to higher-income taxpayers who had benefited from the above-the-line deduction.
Above-the-Line Deduction
Before 2021, taxpayers could deduct up to $4,000 of qualified tuition and related expenses for
postsecondary education (both undergraduate and graduate) from their gross income. Expenses
that qualified for this deduction included tuition payments and any fees required for enrollment at
an eligible education institution.39 Other expenses, including room and board expenses, were
general y not qualifying expenses for this deduction. The deduction was “above-the-line,” that is,
it was not restricted to itemizers.
36 Section 139B of the Internal Revenue Code.
37 IRS Chief Counsel Advice 200302045, December 3, 2002, https://www.irs.gov/pub/irs-wd/0302045.pdf.
38 Section 222 of the Internal Revenue Code for the above-the-line deduction and Section 25A for the Lifetime
Learning Credit .
39 Payments made with borrowed funds are eligible for the deduction: the year of eligibility is determined by the date
payment is made to the institution and not when the lo an is repaid.
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Individuals who could be claimed as dependents, married persons filing separately, and
nonresident aliens who do not elect to be treated as resident aliens did not qualify for the
deduction, in part to avoid multiple claims on a single set of expenses.
The amount that could be claimed for the deduction was general y reduced by any tax-free
assistance, if that assistance could be used to pay for expenses that qualify for the deduction. Tax-
free assistance includes tax-free grants and scholarships (including Pel Grants), employer-
provided educational assistance, and veterans’ educational assistance.40
The maximum deduction taxpayers could claim depended on their income level. Taxpayers could
deduct up to
$4,000 if their income was $65,000 or less ($130,000 or less if married filing
jointly); or
$2,000 if their income was between $65,000 and $80,000 ($130,000 and
$160,000 if married filing jointly).
The deduction was phased out between $65,000 and $80,000 for single returns and between
$130,000 and $180,000 for joint returns. These income limits were not adjusted for inflation.
The above-the-line deduction for qualified tuition and related expenses was enacted temporarily
by the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16). It was
extended a number of times. Most recently, the deduction was extended through December 31,
2020, in the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the
Further Consolidated Appropriations Act, 2020 (P.L. 116-94). The Taxpayer Certainty and
Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act,
2021 (P.L. 116-260), repeals the tuition and fees deduction and increases the phaseout for another
higher education tax benefit, the Lifetime Learning Credit (LLC), discussed below.
The deduction benefited taxpayers according to their marginal tax rate. Students usual y have
relatively low incomes, but they may be part of families in higher tax brackets. The maximum
amount of deductible expenses limited the tax benefit’s impact on individuals attending schools
with comparatively high tuitions and fees. Because the income limits were not adjusted for
inflation, the deduction became available to fewer taxpayers over time.
The Lifetime Learning Credit
Taxpayers could claim the tuition and fees deduction instead of education tax credits for the same
student. These credits include permanent tax credits: the American Opportunity Tax Credit
(AOTC) and Lifetime Learning Credit (LLC). The AOTC is directed at undergraduate education
and is limited to the first four years of postsecondary education.41 The credit is phased out
between $80,000 and $90,000 for single returns and between $160,000 to $180,000 for joint
returns. The LLC is not limited in years of coverage and equals up to $2,000 per taxpayer.42 It
was phased out between $59,000 and $69,000 for single returns and from $118,000 to $138,000
for joint returns, for 2020, with these limits adjusted annual y for inflation. These credits
general y were more advantageous than the deduction, except for higher-income taxpayers, in
40 Qualified expenses being deducted also must be reduced if paid with tax-free interest from Education Savings Bonds,
tax-free distributions from Coverdell Education Savings Accounts, and tax -free earnings withdrawn from Qualified
T uition Plans (i.e., 529 Plans).
41 See CRS Report R41967,
Higher Education Tax Benefits: Brief Overview and Budgetary Effects, by Margot L.
Crandall-Hollick.
42 20% of up to $10,000 of qualifying expenses.
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part because the credits are phased out at lower levels of income than the deduction. The
legislation permanently increases the phaseout for the LLC to the same levels as the AOTC.
One criticism of education tax benefits is that the taxpayer is faced with a confusing choice of
deductions and credits and tax-favored education savings plans, and that these benefits should be
consolidated. The deduction’s distribution indicated that some of the benefit was concentrated in
the income range where the LLC has phased out, but also that significant deductions were
claimed at lower income levels. Because the LLC was preferable to the deduction at lower
income levels, it seems likely that confusion about the education benefits may have caused
taxpayers not to choose the optimal education benefit.43 By repealing the deduction and
increasing the credit’s income limits, a single set of tax benefits wil be more available to higher-
income individuals, and lower-income individuals wil no longer use the deduction instead of the
credit.
Author Information
Molly F. Sherlock, Coordinator
Sean Lowry
Specialist in Public Finance
Analyst in Public Finance
Jane G. Gravelle, Coordinator
Grant A. Driessen
Senior Specialist in Economic Policy
Specialist in Public Finance
Mark P. Keightley
Specialist in Economics
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.
43 T he Government Accountability Office (GAO) has also discussed the lack of optimal choices with education
preferences. See GAO,
Im proved Tax Inform ation Could Help Fam ilies Pay for College, GAO-12-560, May 18, 2012,
http://www.gao.gov/products/GAO-12-560; and GAO,
Multiple Higher Education Tax Incentives Create Opportunities
for Taxpayers to Make Costly Mistakes, GAO-08-717T , May 1, 2008, http://www.gao.gov/products/GAO-08-717T .
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