On February 9, 2018, Congress passed and President Trump signed into law the Bipartisan Budget Act of 2018. The main purpose of the legislation was to fund the government through March 23, 2018, but it also provided a few relevant retroactive tax changes we should note and be aware of for tax year 2017.
The Bipartisan Budget Act of 2018 extended the following through 2017:
a. the exclusion for discharge of indebtedness on a principal residence under §108;
b. treatment of mortgage insurance premiums as deductible qualified residence interest under §163; and
c. the above-the-line deduction for qualified tuition and expenses for higher education under §222.
Unfortunately, these three items do not represent any sort of a planning opportunity since they are retroactive to 2017. The main application to our readers and customers would only be the need to incorporate these changes into 2017 1040s and amend any affected already-filed returns that are now due refunds. Remember Form 1040X is still paper filed through mailing.
The current sentiment is certainly against these extenders being renewed yet again for tax year 2018. Each extended provision had its shot at permanence through the tax reform process. Take the exclusion for indebtedness cancellation on a principal residence. As is typical of many of these extended provisions, applicability has become rather limited. With the improved economy, fewer homes are now underwater. As a result, fewer short sales are taking place where the purchase price covers a reduced mortgage amount agreed to by the mortgagee bank – the requisite forgiveness forming the basis for the debt cancellation by the mortgagee lender to the seller. So fewer sellers are receiving 1099-Cs for debt cancellation on a principal residence. Washington could have easily made the exclusion permanent in its tax legislation passed in December, but it chose against doing so. Similarly, each extender could have been made permanent but ultimately remained temporary. My guess is it’s the bottom of the ninth for extenders, and it doesn’t look like extra innings. A concerted lobbying effort could certainly stretch out another year for some of these items, but do not be surprised if 2017 is their final year.
The Act also enabled some business and energy extender provisions which would not be as relevant to nearly as many practitioners as the individual extenders discussed above. In addition, the Act made some minor changes to the rules governing 401(k) hardship distributions and provided tax relief to the victims of the California wildfires and Hurricanes Harvey, Irma, and Maria.
The other noteworthy item is emblematic of an attempt to make filing easier for older Americans. The Act requires the IRS to come up with a simplified tax return delineated as Form 1040SR for those age 65 and older by the close of the tax year. The Form 1040SR is to be as similar as possible to Form 1040EZ and is to be made available for tax years beginning after February 9, 2018. Therefore, this to-be-created Form 1040SR will not be an issue for practitioners during this filing season or the next filing season.
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Nick Spoltore is Senior Director of Tax & Advisory Content for Surgent CPE. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School. Before joining Surgent, he practiced tax and business law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.