Tax Guide for Investors

Budget Deal Affects 2017 Tax Returns

February 9, 2018

The budget deal passed on February 9, 2018 contains a number of provisions that affect tax returns for 2017 — even though the tax filing season is already under way and millions of tax returns have been filed. These changes fall into two categories.


Dozens of provisions that expired at the end of 2016 have been extended for 2017. Three are of particular importance to individual taxpayers:

  • PMI. For a several years now the law has permitted itemizers to deduct qualified mortgage interest premium payments, commonly known as PMI. This provision expired at the end of 2016, but has now been retroactively extended through 2017. Some 4 million taxpayers are affected.
  • Discharge of mortgage indebtedness. Subject to exceptions, the general rule is that you have to report income when discharge of indebtedness relieves you of the obligation to repay money you borrowed. An exception for qualified principal residence indebtedness that expired at the end of 2016 has been retroactively extended through 2017.
  • Tuition and fees. Similarly, an above-the-line deduction for qualified tuition and fees has been extended through 2017.

Dozens of other provisions have been similarly extended. Some are narrow provisions of little interest to most taxpayers, such as a credit for training mine rescue teams. Yet there are others that could affect individual taxpayers. For example, if you insulated your home, you may qualify for the nonbusiness energy property credit. Due to the large number of these provisions, it’s probably a good idea to hold off on filing your return if it includes any item that would have qualified for a deduction or credit that expired at the end of 2016, until you can determine whether that item was extended — and whether the IRS is ready to accept a return claiming that tax benefit.

Disaster relief

The law contains provisions providing tax relief to people affected by the California wildfires and various hurricanes. For example, you may be able to take money from an IRA without paying an early distribution penalty, and subsequently be permitted to restore those dollars to your retirement account. These provisions are too extensive for a full description here, so look for future guidance from the IRS.

Effect on filing season

The IRS is probably about as well prepared for this as they could be, but that doesn’t mean they can respond instantaneously. Anticipating a possible problem, they didn’t remove the affected lines from tax forms, but showed them as “reserved for future use.” Extensive revisions to their software won’t be necessary, but any changes must go through a testing protocol before going live, so we shouldn’t expect to be able to file returns claiming these items right away. Meanwhile, those who still pick up paper forms from IRS offices or libraries can’t expect to see corrected printed forms anytime soon. They’ll have to download forms online or, preferably, join the vast majority of taxpayers who benefit from electronic filing.

If you need guidance on claiming these benefits, you’ll have to look to prior year versions of IRS publications, because the 2017 versions will simply say these benefits have expired. You can read about the PMI deduction and the rule for qualified principal residence indebtedness in the 2016 version of Publication 530, and the tuition and fees deduction in the 2016 edition of Publication 970.

Already filed? If you’ve already filed, but now are eligible for additional tax benefits, you’ll be able to seek a refund by filing an amended return.,

Tax Season Advisory

January 5, 2018

Based on announcements by the IRS, here are some important dates and other information to keep in mind regarding this year’s tax season. Read the rest of this entry »

Last Minute Actions for the New Tax Law

December 20, 2017

As these words are being written, it appears all but certain that we’ll have a new tax law with some rather drastic changes taking effect in 2018. We’ve reviewed the law for issues that may require attention in the last few days of 2017, and came up with the following four items:

Itemized Deduction for State and Local Taxes
Some people will benefit by paying in 2017 tax they would otherwise pay in 2018, but there’s a catch.

Roth Recharacterization Repealed
If you want to undo a Roth conversion you did earlier in 2017, it appears you’ll have to do this before the end of the year.

Loss on IRA Liquidation
In rare circumstances it can make sense to liquidate an IRA when your basis in the IRA exceeds the value of the assets. The opportunity to make this move disappears December 31, 2017.

Alimony Deduction Repealed
If you’re close to completing a divorce settlement agreement, the tax consequences may be more favorable if you close the deal before the end of 2017.

Itemized Deduction for State and Local Taxes

December 20, 2017

This is the first in our series Last Minute Actions for the New Tax Law.

The new tax law will make it harder to benefit from itemized deductions for state and local tax, partly because of an increase in the standard deduction and partly because of a new limit on this particular deduction. Affected taxpayers may want to consider prepaying tax they otherwise would pay in 2018, but the law appears to block this strategy as to prepayments of state and local income tax. Read the rest of this entry »

Roth Recharacterizations Repealed

December 20, 2017

This is the second in our series Last Minute Actions for the New Tax Law.

We’re pleased to say that the strict interpretation of the effective date for this change in the law, which we initially thought was most likely, will not apply. We have confirmed that the IRS will be taking the position that 2017 Roth conversions can be recharacterized until October 15, 2018.

Moving money from a traditional retirement account to a Roth IRA can be a smart move, but sometimes it backfires due to a change in personal circumstances or, more often, investment losses in the converted account. We haven’t had to worry too much about this possibility, though, because we could recharacterize a Roth conversion — in other words, undo it — at any time up until October 15 of the following year. The new law does away with this opportunity. As of 2018, we’re no longer allowed to reverse these transactions. Read the rest of this entry »

Loss on IRA Liquidation

December 20, 2017

This is the third in our series Last Minute Actions for the New Tax Law.

In limited circumstances, it can make sense to liquidate an IRA for the purpose of claiming a loss deduction. This works only if the total amount of basis you have in all your IRAs in the same category (traditional or Roth) exceeds the total value of those IRAs. Even then, it isn’t necessarily a good idea, but in the right situation, shutting down IRAs to claim a tax loss can be a smart move. This opportunity disappears at the end of 2017. Read the rest of this entry »

Alimony Deduction Repealed

December 20, 2017

This is the fourth in our series Last Minute Actions for the New Tax Law.

But we were wrong! Reading too fast, we thought repeal of the alimony deduction took effect in 2018, but this change in the law is delayed until 2019. Many thanks to the good folks at Kiplinger for alerting us to our error. You have another year to get over all those horrible things your spouse did and reach agreement on a settlement that maximizes overall tax benefits.
Read the rest of this entry »

Relief for Missed Rollover Deadline

August 25, 2016

One of the more common mistakes people make in handling their retirement accounts is missing the 60-day deadline for completing a rollover. If you have a good excuse, you can get a ruling from the IRS that avoids the negative tax consequences, but that process is painfully expensive in time and money. Thanks to new guidance from the IRS, in many cases this won’t be necessary.

Read the rest of this entry »

Tax Planning in a Nutshell

July 12, 2016

What is tax planning, anyway? We challenged ourselves to provide the shortest possible explanation:

Tax Planning in 100 Words

Custodial Accounts for Minors

July 9, 2016

Our updated online guide to custodial accounts for minors explains all the ins and outs of using these accounts established under the Uniform Transfers to Minors Act, or UTMA. Pages of interest:

UGMA & UTMA Custodial Accounts for Minors
Top page of this guide, with an index to the other pages.

UTMA Regret: When Custodial Accounts Turn Sour
What if you find that it was a mistake to set up a custodial account? Here are some of the reasons for what we call UTMA regret, and strategies for dealing with it.

UTMA Transfer to a 529 Account
Can you transfer a custodial account to a 529 savings account? Should you?