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.

Extenders

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.,


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