The Tax Cuts and Jobs Act (TCJA) swept in a tidal wave of changes to federal tax rules just seven weeks before Congress passed more legislation that could affect many taxpayers. The Bipartisan Budget Act of 2018 (BBA), signed into law on February 9, 2018, contains several tax-related provisions that extend or create tax benefits for the 2017 tax year.
The BBA extends for one year a set of tax provisions, known as extenders, which expired at the end of 2016. Below are the key provisions that have been extended:
Exclusion of Discharge of Mortgage Debt
The BBA extends homeowners’ ability to exclude from gross income mortgage debt on a principal residence that was forgiven in 2017 (for example, as a result of a foreclosure, short sale or loan modification). It also modifies the exclusion to make it apply to debt discharged later than 2017 but according to a written agreement that was entered into in 2017. Without the extended provision, the amount of mortgage debt forgiven would have been additional taxable income.
Deductibility of Mortgage Insurance Premiums
Certain taxpayers can continue to treat mortgage insurance premiums as deductible interest. This affects taxpayers who itemize deductions and is phased out over adjusted gross income (AGI) from $100,000 to $110,000.
Deductibility of Qualified Tuition and Related Expenses
The BBA extends the “above-the-line” deduction for higher education expenses. Since it is above-the-line, taxpayers do not need to itemize to take advantage of the deduction, but it is limited based on income. The deduction is capped at $4,000 for individuals with AGI that doesn’t exceed $65,000 ($130,000 for joint filers) and $2,000 for individuals with AGI that doesn’t exceed $80,000 ($160,000 for joint filers).
Incentives for Empowerment Zones
Empowerment zones are located in economically distressed areas. The BBA extends through 2017 the tax incentives — including tax-exempt bonds, employment credits, increased expensing and certain gain exclusion — for certain businesses and employers to operate in empowerment zones.
Additional Tax-Related Provisions
The BBA also contains several other provisions that could affect federal taxes, including:
Estimated Corporate Tax Payments
The BBA repeals a rule that would have required corporations with assets of at least $1 billion to increase the amount of the estimated taxes installment due in July, August or September of 2020 by 8%, with the next required installment (due in October, November or December of 2020) reduced accordingly.
Senior Citizen Tax Returns
Beginning with their 2019 taxes, taxpayers age 65 or older should be able to file their federal income taxes on a new Form 1040SR. The form is intended to be as simple as Form 1040-EZ. It will allow reporting of Social Security and retirement distributions, interest and dividends, and certain capital gains and losses.
The BBA provides tax relief for people affected by the 2017 California wildfires, including: an employee retention tax credit; special rules for early distributions from retirement plans; and deductions for personal casualty losses. The BBA also extends similar tax relief to eligible taxpayers in disaster areas hit by Hurricanes Harvey, Irma and Maria.
Two amendments clarifying whistleblower rights made their way into the BBA.
First, the deduction for attorney fees is expanded to awards under the Dodd-Frank Act and state False Claims Acts. This treatment prevents double taxation of the fees (first as part of the entire amount received by the whistleblower and again on the amount paid to the attorney).
The second amendment defines “collected proceeds” to include criminal fines and civil forfeitures. In some cases, the IRS had argued that these amounts were not “collected proceeds”, thereby limiting the awards to the whistleblowers.
What If Your 2017 Return Has Been Filed?
The IRS is reviewing the BBA and plans to provide additional information as quickly as possible. Typically, taxpayers whose 2017 returns are already filed will likely need to file amended returns to take advantage of the benefits described above, but the IRS could provide an alternative solution.