Tax Law Changes That Can Affect Your 2017 Return

Some significant tax law changes took effect retroactively in 2018

Approximately 8 million taxpayers file extension requests with the Internal Revenue Service each year to delay submitting their tax returns beyond April 15. You're not alone if it's mid-year and you haven't filed yet...and it might actually be a good thing.

Numerous changes were made to the U.S. tax code in 2017 and 2018 and some were made retroactively in April 2018. You might not have been aware of them if you'd already filed your return. Some deductions that had been eliminated for 2017 were resuscitated. 

If you're still in the process of completing your 2017 tax return, you'll want to keep these changes in mind. And if you've already filed, talk to a tax professional about filing an amended return if any of these changes would have affected your bottom line. 

Last Chance for Personal Exemptions

The personal exemption amount stays stuck at $4,050 for 2017, although the income thresholds for being able to claim it have changed. The phase-out begins at adjusted gross incomes of $261,500 in 2017—if you have this much income, you can’t claim the entire exemption. It’s eliminated entirely for those with AGIs of $384,000 or more in 2017.

Now here's the bad news. Personal exemptions are eliminated for everyone beginning in the 2018 tax year so grab it now while still you can. 

The Obamacare Tax Penalty—Is It Gone Yet?

Uninsured? You may have to pay a tax for not having health insurance.
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There was some big news in 2017 with regard to that Obamacare tax penalty that hits taxpayers who decline to carry health insurance. Unfortunately, it didn't end up amounting to much in the way of change, at least not for 2017 returns. 

The Affordable Care Act is still in effect. The Trump administration has not yet changed that. But one of Trump’s first official acts as president was to sign an executive order that began whittling away at its tax impact on Americans.

Taxpayers are supposed to indicate on line 61 of their 1040 tax returns whether they had insurance during the tax year or if they qualified for an exemption. The IRS has automatically rejected returns if this line was left blank. In other words, addressing it was mandatory.

Then President Trump’s executive order directed that government agencies “exercise authority and discretion available to them to reduce the potential burden …” The IRS responded by issuing a statement that it would not automatically reject returns with blank lines 61, although it cautioned that those who don’t carry insurance still owe the penalty. Completing line 61 became “optional"—at least for a little while. 

The IRS then did a complete about-face in October 2017 and announced that it would indeed reject returns that don't provide this information. So yes, you must still complete line 61 when you prepare your 2017 tax return. 

But take heart. This, too, is temporary. Beginning with 2019 tax returns, the Tax Cuts and Jobs Act, signed into law in December 2017, abolishes the associated tax penalty for not carrying insurance.

Changes to the Itemized Medical Expense Deduction Threshold

Health Insurance claim
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This one has historically be shifty, sometimes changing from year to year. 

You can claim a tax deduction for medical expenses you pay, including health insurance premiums, if you elect to itemize on your tax return. That hasn't changed. It's the amount of your qualifying expenses that tends to move around a bit. 

At one point, you could deduct expenses that exceeded 7.5 percent of your AGI, then the Affordable Care Act changed that to 10 percent for everyone except taxpayers age 65 or older. They remained at the 7.5 percent rate through the end of 2016. Beyond that time, they became subject to the 10 percent rate.

So as of 2017, everyone was supposed to be limited to deducting expenses in excess of that 10 percent threshold. Then came the TCJA. The new tax law put the threshold back to 7.5 percent for 2017 and for 2018 as well. It's not slated to go back to 10 percent until 2019. 

The Mortgage Insurance Premium Deduction Is Back!

Man holding house in hands
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It used to be that you could claim a tax deduction for mortgage insurance premiums if you itemized. That deduction was supposed to be eliminated for 2017 because the Protecting Americans from Tax Hikes Act extended it for just one more year in 2015. Technically, it was supposed to expire at the end of 2016.

But that didn't happen. The Bipartisan Budget Act of 2018, passed in April, reinstated this deduction retroactively for yet another year. It's alive and well again through the end of 2017. You can still claim it on your 2017 tax return. 

The Above-the-Line Tuition and Fees Deduction Is Reinstated, Too

graduate in cap and gown

The tuition and fees deduction is another one that was supposed to expire at the end of 2016, and this was a particularly nice one. You don't have to itemize to claim it—it comes off your taxable income as an adjustment to income “above the line” on the first page of your 1040 tax return. You can take it and take the standard deduction or itemize other deductions. It helps to determine your AGI, which several tax break phase-outs are subject to.

The BBA came to the rescue again, resuscitating this deduction as well retroactively through the end of 2017. So go ahead and claim all that tuition you paid on behalf of yourself, your spouse, or a dependent. 

New Life for the Discharge of Foreclosure Indebtedness

Rural house in Vermont.
© Jeff Randall / Photodisc / Getty Images

Another big change for 2017 was the elimination of the tax code provision that allowed taxpayers to discharge indebtedness related to home foreclosure. Foreclosure has historically been treated as a taxable event. Taxpayers are obligated to report and pay taxes on forgiven debt, so if foreclosure wipes out your $100,000 mortgage, you would have to report that amount as income.

The qualified principal residence indebtedness exclusion prevented this from happening through the end of 2016. It permitted taxpayers to exclude up to $2 million in forgiven debt based on the extent of their insolvency just before foreclosure—the extent by which their overall indebtedness exceeded the overall value of their assets.

But this exclusion didn't quite expire either at the end of 2016. The BBA breathed new life into this provision as well so if you suffered a foreclosure in 2017, you're spared having to report the income for at least one more year. The exclusion remained alive and well through the 2017 tax year. 

New Tax Brackets? Not Yet

Businesswoman holding out hand for money

President Trump’s campaign promises for sweeping tax changes regarding tax brackets and the standard deduction didn't go into effect until January 2018. Tax brackets remain the same as in previous years for 2017: They're set at 10, 15, 25, 28, 33, 35 and 39.6 percent. The new ones don't take effect until the 2018 tax year. 

The only really significant change here relates to who falls into that 39.6 percent tax bracket. As of 2017, the income limits increase from $415,050 to $418,400 for single taxpayers, and from $466,950 to $470,700 for married taxpayers who file joint returns. Taxpayers with incomes over these thresholds fall into the current highest tax bracket.

The limits for the other tax brackets remain in the $50 range thanks to a modest inflation rate, and $100 for those who are married and filing jointly.

Standard Deduction Amounts Don't Change Yet, Either

Standard deduction amounts increase marginally, too—literally just $50 in most cases. The really big jump to approximately double what they used to be doesn't happen until the 2018 tax year.

They’re set at $6,350 for single taxpayers and married taxpayers filing separate returns for 2017, and at $12,700 for those who are married and filing jointly. The standard deduction is $9,350 for those who qualify as head of household.

Remember, this is for your 2017 tax return. The new, far more generous deductions apply to 2018. 

The Earned Income Tax Credit

Parents with newborn in hospital
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Relax—the earned income tax credit has not been eliminated, although there are a couple of changes here as well. The PATH Act prevents the IRS from sending out refunds to anyone claiming this tax credit or the Additional Child Tax Credit until February 15 each year beginning in 2017.

The idea is that this gives the IRS some time to investigate fraudulent claims for these credits. You may have already come up against this change if you claimed either of them for the 2016 tax year and you filed your return as soon as possible only to wait and wait for your refund. This delay is not a one-time event. The PATH Act requires it going forward beginning January 1, 2017.

The good news is that the maximum EITC goes up to $6,318 in 2017 for married taxpayers with three or more qualifying children if they file a joint return, and other eligible taxpayers will see a slight increase in 2017 as well.  

Tax Rules Aren't Forever

Keep in mind that the Tax Cuts and Jobs Act is set to expire at the end of 2025 unless Congress renews it. Changes brought about by this law aren't necessarily forever.

As for those provided for under the Bipartisan Budget Act, most were extended for just one more year—2017. Congress might save them again for 2018, but only time will tell.