Budget agreement brings additional tax changes — some affecting 2017 returns

The dust is still settling from the Tax Cuts and Jobs Act (TCJA), which was passed in December 2017 and has drastically altered the federal tax system. And now, the Bipartisan Budget Act of 2018 (BBA), signed into law on Feb. 9, contains additional tax-related provisions that taxpayers should take note of. Though tax-filing season is already underway, some of the extenders and measures within the BBA could affect your liability for the 2017 tax year.

Tax extenders

For one year, the BBA will extend a set of tax provisions (“extenders”), that expired at the end of 2016. Several significant provisions that have been extended include:

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 so that it applies to debt discharged later than 2017 but according to a written agreement that was entered into in 2017. Without the extended provision, taxpayers would generally have to pay income taxes on the amount of mortgage debt forgiven.

Deductibility of mortgage insurance premiums
Taxpayers can continue to treat mortgage insurance premiums as deductible interest. However, this only applies to taxpayers who choose to itemize deductions, and changes under the TCJA are expected to significantly reduce the number of taxpayers who do so. Further, the deduction phases out for taxpayers with adjusted gross income (AGI) of $100,000 to $110,000.

Deductibility of qualified tuition and related expenses
“Above-the-line” deductions are subtracted from a taxpayer’s gross income to calculate AGI. The BBA extends the above-the-line deduction for higher education expenses. Taxpayers do not have to itemize to take advantage of this deduction, but it’s 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).

Tax 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 stipulations that could affect federal taxes, including those related to:

Estimated corporate tax payments
The BBA repeals a rule in the Trade Preferences Extension Act of 2015 regarding the payment of certain estimated corporate taxes. The rule would have required corporations with assets of at least $1 billion to increase the amount of the estimated tax installment due in July, August or September of 2020 by 8 percent, 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 BBA directs the IRS to create a form that is as simple as Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents. This form will establish an easier method of reporting Social Security and retirement distributions, interest and dividends, and certain capital gains and losses.

Natural disaster relief
The BBA also delivers tax relief for those affected by the 2017 California wildfires. These provisions include an employee retention tax credit as well as special rules regarding early distributions from retirement plans and deductions for personal casualty losses due to the fires. The BBA also extends similar tax relief measures that had previously been offered to eligible taxpayers in disaster areas hit by Hurricanes Harvey, Irma and Maria.

Whistleblower awards

The BBA contains two amendments that provide clarity on whistleblower rights. The first makes clear that whistleblowers awarded money under the Dodd-Frank Act and state False Claims Acts — not just under the Federal False Claims Act and federal tax laws — are entitled to an above-the-line tax deduction for their attorneys’ fees. This stipulation 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 pertaining to whistleblowers in the BBA defines “collected proceeds” to include criminal fines and civil forfeitures. In some cases, the IRS has argued that the amount of proceeds — which determines the amount of money awarded to an IRS whistleblower — was limited to proceeds collected under the Internal Revenue Code (for example, the tax cheat’s penalties and interest), thereby excluding the consideration of criminal fines and civil forfeitures from the money awarded.

Next steps

There’s likely to be some confusion surrounding the BBA provisions that retroactively apply to 2017 taxes — particularly for taxpayers who have already filed their returns. The IRS has indicated that it’s reviewing the BBA and plans to provide additional information in the near future. If you’ve already filed your 2017 return, you’ll likely need to file amended returns to take advantage of the benefits described above. However, the IRS could yet offer an alternative solution. Please reach out to us if you have any questions about tax reform and how the recent changes might impact you.

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