Posted by On February 9, 2018, the President signed the Bipartisan Budget Act of 2018. This legislation retroactively extended through 2017 several provisions of the Internal Revenue Code that had expired at the end of 2016. These provisions generally allowed taxpayers to take certain deductions or credits, or otherwise obtain favorable tax treatment.
How the Bipartisan Budget Act might affect you
If you were eligible in 2017 for one of the tax benefits extended by the Bipartisan Budget Act, then you should claim that benefit (such as a deduction) on your 2017 federal income tax return. Many taxpayers filed their 2017 tax return early, before they or their tax preparers could take the new legislation into account. If you filed early, you should (1) consider whether you are eligible for any of the benefits that were retroactively reinstated, and (2) determine whether you claimed those benefits on your 2017 tax return. Even if you did not file early, you should discuss with your return preparer whether you are eligible for any of the extended benefits and make sure that they are properly claimed on your return.
What favorable tax provisions were retroactively reinstated by the legislation?
The three provisions that will affect the most individuals are:
- Deduction for mortgage insurance premiums. Individuals sometimes are required by a lender to pay mortgage insurance premiums for home mortgage loans used to acquire or substantially improve their homes. Generally, individuals who pay mortgage insurance premiums can treat them in the same way they treat interest paid on the home mortgage loan. This means that mortgage insurance premiums generally are allowed as a deduction on Schedule A of the tax return for those who itemize their deductions. This deduction is in effect for mortgage insurance premiums paid through December 31, 2017.
- Deduction for tuition and fees paid for higher education. Individuals who pay tuition and fees for higher education can deduct the cost if certain requirements are met. The deduction is a so-called “above-the-line” deduction, which means that individuals eligible for the deduction can take it whether they itemize (i.e., list separately on Schedue A) their deductions or instead take the standard deduction. Generally, the deduction is available for tuition and fees paid for the taxpayer, the taxpayer’s spouse, or dependents. The maximum deduction is either $2,000 or $4,000 depending on the level of the taxpayer’s income. A common scenario in which this deduction is available is when parents pay college tuition for a child. This deduction is available for tuition and fees paid through December 31, 2017. (Note: it might be more beneficial to take a tax credit for the costs of tuition and fees. These credits are either the American Opportunity Credit or the Lifetime Learning Credit. You should discuss with your tax adviser whether to take the deduction or the credit.)
- Tax-free treatment of home mortgage debt that is cancelled. If a lender cancels or reduces a borrower’s debt, the amount of the cancelled or reduced debt generally is treated as income on which the borrower must pay tax. There are several exceptions to this rule. One of these exceptions is when the debt that is cancelled or reduced is “qualified principal residence indebtedness.” Generally, this is debt incurred to acquire or substantially improve an individual’s principal residence. Under this exception, if the debt that is cancelled or reduced meets the definition of qualified principal residence indebtedness, then the borrower does not need to include in their income the cancelled or reduced debt. The borrower can exclude from their income up to $2 million ($1 million if married filing separately) of eligible cancelled or reduced debt. This exception is available through December 31, 2017.
Other provisions that were retroactively extended
There are several other provisions that the Bipartisan Budget Act retroactively extended. Many of them are tax credits for energy-efficient property placed in service by December 31, 2017. For example, a tax credit is available for certain energy-efficient home improvements. These include exterior windows, exterior doors, and energy-saving roofs. They also include high-efficiency furnaces, water heaters, and air conditioning systems.
What you should know about filing an amended return
If you have already filed your 2017 federal income tax return without claiming one of the extended benefits for which you are eligible, you can amend your 2017 return. The amended return could result in a refund of tax you have already paid. Unlike your original return, however, an amended return cannot be electronically filed. You will have to print out and mail your amended return. It can take the IRS up to sixteen weeks to process an amended return.
Action you should take now
Determine whether you are eligible for any of the favorable provisions that were retroactively extended by the Bipartisan Budget Act of 2018 and make sure they are appropriately claimed on your 2017 tax return. At McGovern Tax Services, we would be happy to discuss your eligibility for these benefits and to prepare an original or amended 2017 return for you.