As a result of the government shutdown, at mid-night on February 8, 2018, Congress passed, and the President signed, the Bipartisan Budget Act of 2018, on February 9th. Congress included several tax extenders as part of the Budget Deal, which had previously expired at the end of 2016. The Bipartisan Budget Act of 2018 consists of 640 pages and within those pages appear many tax provisions which were made retroactive to January 1, 2017 and are effective for the year 2017 only.
These expired tax provisions were originally included in either the House or Senate version of the new 2017 Tax Reform and Jobs Act. However, they were excluded from the final Bill that was signed into law by the President on December 22, 2017. Some of the tax extenders include:
- The exclusion of income, resulting from a discharge of mortgage debt on a principal residence. Normally mortgagees must pay income tax on the outstanding principal loan balance that is forgiven by the lender, normally in the case of foreclosure or a short-sale.
- Itemized deduction for mortgage insurance premiums connected with acquisition indebtedness on a taxpayer’s principal residence. The taxpayer must have an adjusted gross income (AGI) below $100,000. The deduction phases for AGI between $100,000 to $110,000. For taxpayers that meet the qualifications, the mortgage insurance premiums are treated as additional deductible mortgage interest.
- As an alternative to claiming the American Opportunity Tax Credit or the Lifetime Learning Credit, taxpayers had the ability to deduct from adjusted gross income on page 1 of Form 1040, tuition and related expenses for higher education, if the deduction results in a greater tax benefit than taking a tax credit for the same expenses. This option has been restored for 2017.
- A 10% tax credit for energy-efficient home improvements on your principal residence, up to $500 for items such as windows, doors, and HVAC equipment. This credit has been limited to a lifetime available credit. If energy credits for these types of items were claimed in previous years, the amount of the cumulative credit claimed must be reduced from the $500 lifetime credit limitation.
- A 10% tax credit for residential energy property for qualified fuel cell property, small wind energy property, and geothermal heat pump property. In addition, tax credits have been extended for fiberoptic solar lighting systems, geothermal heat pumps, small wind energy, combined heat and power properties, and qualified fuel cell and microturbine plant properties. These credits were extended through 2021. The 30% tax credit for qualified solar property and solar heating property is still in effect.
- A 10% 2-Wheel plug-in electric vehicle credit is available. If you purchased an electric motorcycle in 2017, the maximum available credit is $2,500.
- Taxpayers that qualify for the Earned Income Tax Credit have the option of using their 2016 year earned income, rather than their 2017 year earned income, if it results in a greater tax credit. This would occur if the 2016 year’s income was greater than the current year.
- Certain racehorses can be depreciated over a 3-year useful life rather than using a 7-year life.
The Bipartisan Budget Act of 2018 also contained a number of disaster relief provisions, for victims of the California wildfires, along with special relief provisions for Puerto Rico.
The Act also modified the rules related to distributions from 401(k) plans, for reason of hardship situations. These rules eliminate the rule which prohibits an employee from making future qualified contributions to their 401(k) plan, for a period of six months, following the hardship distribution. This new rule does not take effect until plan years beginning after December 31, 2018.
Please contact us to review your specific tax situation and additional changes, not be listed here, that may impact you.
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