New Budget Agreement Brings Additional Tax Changes, Could Affect Your 2017 Filing

The Bipartisan Budget Act of 2018 (BBA), which President Trump signed into law on February 9, 2018, contains several tax-related provisions that could reduce the amounts some taxpayers owe for the 2017 tax year.

Tax Extensions

The BBA extends the following tax provisions—that formerly expired at the end of 2016—for one year.

Incentives for Empowerment Zones

Empowerment zones help communities improve their local economies. The BBA extends tax incentives—including tax-exempt bonds, employment credits, increased expensing and certain gain exclusion—through 2017 for certain businesses and employers to operate in empowerment zones.

Energy-Efficient Commercial Buildings Deduction

The act extends the deduction for energy-efficient improvements to a commercial building’s interior lighting or HVAC systems, or to the building’s envelope. Visit our webpage to learn more.

Mortgage Debt Exclusion Discharge

The act extends a homeowner’s ability to exclude their mortgage debt from gross income if the debt was forgiven in 2017. It also applies to debt that was discharged later than 2017, if a written agreement states it was entered in 2017. This exclusion applies to foreclosures, short sales, or loan modifications. Without the extended provision, taxpayers would have to pay income taxes on the amount of forgiven mortgage debt.

Deductibility of Mortgage Insurance Premiums

Taxpayers can now continue treating mortgage insurance premiums as deductible interest. The deduction phases out for taxpayers with adjusted gross income (AGI) of $100,000 to $110,000.

Deductibility of Qualified Tuition and Related Expenses

The BBA extends the above-the-line deduction for higher education expenses. Above-the-line deductions are subtracted from a taxpayer’s gross income to calculate AGI. Taxpayers don’t need to itemize to take advantage of the 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).

Additional Tax-Related Provisions

The new act also contains provisions that could affect federal taxes, including those related to the following areas.

Tax Relief for Recent Natural Disasters

The BBA provides tax relief for people affected by the 2017 California wildfires. That includes new rules regarding early distributions from retirement plans, suspension of deduction limitation for charitable contributions, and deductions for personal casualty losses due to the fires. Businesses can also benefit from an employee retention credit. See our Alert to learn more.

Tax relief provisions made available to eligible taxpayers in disaster areas hit by Hurricanes Harvey, Irma, and Maria are also extended under the new act.

Senior Citizen Tax Returns

Beginning with their 2019 tax return, taxpayers who are age 65 or older should be able to file their federal income taxes on a new Form 1040SR. The form will be as simple as Form 1040-EZ and will allow taxpayers to report social security and retirement distributions, interest and dividends, and certain capital gains and losses.

Whistleblower Awards

Two amendments in the BBA clarify whistleblower rights. The first makes clear that whistleblowers who have been 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 treatment prevents double taxation of the fee—which might first be taxed as part of the entire amount the whistleblower receives and again on the amount paid to the attorney.

The second amendment 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 IRS whistleblowers’ awards—has been limited to proceeds collected under the Internal Revenue Code.

Estimated Corporate Tax Payments

The BBA repeals a rule that would’ve required corporations with assets of at least $1 billion to increase the amount of the estimated taxes installment due in July, August, or September of 2020 by 8%.

Next Steps

Because the BBA includes provisions that retroactively apply to 2017 taxes, it’s sure to cause some confusion—particularly for those taxpayers who have already filed their tax returns.

The IRS has indicated that it’s reviewing the BBA and plans to provide additional information as quickly as possible. Taxpayers who have already filed their returns will likely need to file amended returns to take advantage of the benefits described above, but the IRS could provide an alternative solution.

We’re Here to Help

If you have questions about the BBA or changes introduced through tax reform, please visit our tax reform page or contact your Moss Adams professional.