The Bipartisan Budget Act—How Does the New Tax Law Affect You?

The Bipartisan Budget Act Makes Several Retroactive Changes to the Tax Code

The federal government wasn’t finished with the tax code when President Trump signed the Tax Cuts and Jobs Act in December 2017. Congress went right back to work to hammer out a budget after the first of the year and the Bipartisan Budget Act was signed into law on February 9, 2018. It, too, includes some tax provisions that can affect your 2017 return and going forward. 

A New Tax Form

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First, if you happen to be over age 65, the BBA spares you a little aggravation at tax time. It authorizes a new tax return, Form 1040SR, that’s intended to be as easy to complete as Form 1040EZ.

But taxpayers can’t report retirement distributions or Social Security benefits on that easier tax form even if they otherwise qualified to do so: They earn under $100,000 in taxable income, they have no dependents, and they use either the single or the married filing jointly filing status. Until the BBA, they were stuck with filing the more complicated 1040 long form.

Not anymore. Form 1040SR accommodates common types of retirement income. 

The Mortgage Insurance Premiums Deduction

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The itemized deduction for mortgage insurance premiums was supposed to expire on December 31, 2016. The BBA extends this provision retroactively through the end of December 2017—another year.

You can still claim a deduction for insurance premiums in 2017 if they’re associated with “acquisition indebtedness”—the mortgage you took out to purchase a qualified personal residence. This deduction is subject to certain income thresholds, however. It’s reduced for those who earn more than $100,000, and those with AGIs over $110,000 can’t claim it at all. 

Qualified Principle Residence Indebtedness Protection

Originally a provision of the Mortgage Forgiveness Debt Relief Act,This is the tax break that allowed you to not report “income” resulting from a foreclosure on your primary residence. It also expired at the end of 2016 and the BBA extended it as well. It spares foreclosed taxpayers from paying income tax on forgiven deficiency balances.

In other words, the lender reclaimed your home and sold it but not for enough money to cover your entire outstanding mortgage balance. The lender then issued you a 1099-C tax form indicating that it was not going to hold you responsible for paying the difference. It canceled or forgave the debt.

This would have been taxable income to you in 2017 if not for the BBA. But again, this extension is just for one more year. You must have entered into the foreclosure arrangement with your lender prior to January 1, 2018.

Energy-Related Tax Credits

The IRS wants us to go green and the tax code has historically provided for some energy-related tax deductions and credits to help us along. Several of these also expired at the end of 2016 and the BBA breathed new life into them.

If you used an eligible contractor to build a qualified energy-efficient home in 2017, you remain eligible for a tax credit under Section 45L of the Internal Revenue Code.

Likewise, Section 48 of the Code continues to provide a credit to those taxpayers who install a variety of energy-saving features, including geothermal heat pumps, fiber-optic solar lighting systems, and small wind energy. The BBA extends these credits through 2021. They’re also subject to AGI phaseouts, however. 

The Tuition and Fees Deduction

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The deduction for tuition and education fees you pay on behalf of yourself, your spouse, or your dependents is back for another year. This is particularly advantageous because it’s an “above the line” adjustment to income taken on the first page of 1040.

This can reduce your AGI, that magic number that so many other tax credits and deductions depend upon. If your AGI is too high, you won’t qualify for them, including the Child Tax Credit and the student loan interest deduction. 

Disaster Provisions for Those Caught in the California Wildfires

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Some of the most significant provisions of the BBA address those who were caught in California's wildfires in 2017. 

The BBA allows residents who were affected by the California wildfires to access retirement funds without any penalties that would normally apply. This includes the 10-percent penalty for taking a distribution if you’re younger than age 59 1/2. If you took a “qualified wildfire distribution” of up to $100,000 anytime from October 8 through December 31, 2017, you don’t have to pay the penalty. A word of warning, however—you must be able to prove that you suffered an economic loss due to the fires.

If you took the distributions from March 31, 2017 through January 15, 2018 to buy or build a residence in the wildfire areas but the purchase or construction was halted or made impossible due to the fires, you have until June 30, 2018 to repay the money without penalty.

You can also spread out the income from these distributions over three years rather than reporting it all as income in 2017, stretching out any income tax that comes due on money. 

And finally, you can use your previous year’s income rather than your current year’s income for purposes of qualifying for the earned income tax credit or the child tax credit if you were displaced by the fires. You must have lived in the disaster areas between October 8 and December 31, 2017 to take advantage of this tax break. 

Casualty Loss Changes

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The Tax Cuts and Jobs Act already allowed residents living in declared disaster areas, including those affected by the California fires, to claim deductions for casualty losses, although it eliminated this tax break for others in 2018 and going forward. The BBA gives covered taxpayers a little extra assistance. 

It waives the 10-percent rule—casualty losses must normally exceed 10 percent of your AGI but you don’t have to worry about this under the terms of the BBA. The loss must have occurred after October 8, 2017.

Of course, claiming casualty losses means itemizing your deductions and maybe you don’t want to do this. You can still claim a tax break for these losses under the terms of the BBA if you want to claim the standard deduction instead. The BBA allows you to add them to your standard deduction, increasing it.

Even if you’re subject to the Alternative Minimum Tax so you’re not eligible to claim a standard deduction, you can still claim the amount of your casualty losses as a standard deduction. 

It's Not Too Late

Some of these changes are retroactive and will affect your 2017 return. If you’ve already filed your 2017 return and you were unaware of these changes, it’s not too late to take advantage of them.

You can file an amended return for up to three years from the date you filed your original return or two years after you paid any taxes due on that return, whichever is later.