United States: New Tax Legislation In 2018 Affecting 2017 Tax Returns

Last month, Congress passed and President Donald Trump signed into law H.R. 1892, known as the Bipartisan Budget Act of 2018 (the Act). This extensive legislation funds the government through March 23 and, as if the comprehensive new tax act passed late last year wasn't enough, includes many tax breaks for individuals and businesses.

The Act renewed for tax year 2017 a wide range of individual and business tax benefits that had expired at the end of 2016 (extender provisions), added a few miscellaneous tax-related provisions (nonextender provisions), and added significant disaster tax relief (disaster provisions) for victims of the California wildfires and Hurricanes Harvey, Irma and Maria. The Act also includes some provisions left out of the new law passed last year.

Below is a summary of the various provisions that may impact your personal or business situation.

Individual Extender Tax Provisions

  • Exclusion for discharge of debt on a principal home — The Act excludes from gross income the discharge of qualified residence debt for an additional year for debt cancellations made in 2017, or by a written arrangement entered into in 2017. Qualified residence indebtedness is defined as acquisition indebtedness on a taxpayer's principal residence, up to a $2 million limit ($1 million for married individuals filing separately).
  • Extension of mortgage insurance premiums treated as deductible mortgage interest — The Act extends for an additional year (to 2017) mortgage insurance premiums to be treated as qualified residence interest. The deduction phases out for taxpayers that have adjusted gross incomes of over $100,000 ($50,000 for married individuals filing separately).
  • Extension of qualified tuition and related expense deduction — The Act extends, through 2017, an adjustment to gross income for qualified tuition and related expenses for higher education. A $4,000 deduction is available for married filing joint taxpayers that have adjusted gross incomes under $130,000 ($65,000 for everyone else). For married filing joint taxpayers with adjusted gross income between $130,000 and $160,000 ($65,000 and $80,000 for everyone else) the deduction is reduced to $2,000.
  • Extension of credit for nonbusiness energy property — The budget extends through 2017 the allowance of a credit for qualified energy efficiency improvements made in 2017. In general, the credit is 10 percent of the cost incurred, to a maximum credit of $500. Prior year credits taken under this provision count toward the $500 lifetime maximum credit allowed.
  • The residential energy efficient property credit is extended through December 31, 2021, and includes qualified solar electric property expenditures, qualified solar water heating property expenditures, qualified fuel cell property expenditures, qualified small wind energy property expenditures and qualified geothermal heat pump property expenditures.

Business Extender Tax Provisions

  • Extension of three-year depreciation for certain racing horses — The Act extends to 2017 the ability to use a three-year recovery period for racehorses placed into service before the end of 2017.
  • Extension of expensing rules for particular film, television and theatrical productions — The Act extends to 2017, expensing of costs incurred for qualified film, television and live theatrical productions. Up to $15 million of costs can be expensed with a higher amount available for costs incurred in low income or distressed communities.
  • Extension of new energy efficient home credit — The Act allows through the 2017 tax year, a tax credit available to contractors who build energy efficient residential homes. The home must be built or manufactured by an eligible contractor and acquired from the contractor by a person for use as a residence during the taxable year. The maximum credit available is $2,000.
  • Extension of energy efficient commercial building deduction — The budget extends through 2017 a deduction equal to the cost of energy efficient building property placed into service during the taxable year. The property must be depreciable, located in the United States and installed as part of interior lighting, HVAC or the building envelope. The property must be certified as part of a plan to reduce annual energy and power costs.
  • The energy credits and credit phaseouts are extended to periods ending before January 1, 2022. This provision affects solar and thermal energy property, fiber-optic solar property, qualified fuel cell property, qualified small wind energy property, qualified micro turbine property, and combined heat and power system property.

Nonextender Tax Provisions

  • Foundation excess business holding tax exception — The Act adds a new Internal Revenue Code section providing an exception from a tax on certain business enterprise holdings of a private foundation.
  • Modification of 401(k) hardship distribution rules — Prior to the Budget Act, an employee receiving a hardship distribution was unable to contribute to the 401(k) plan for at least six months after receiving the distribution. Under the new law, the six-month prohibition on contributions has been lifted. These changes apply to plan years after December 31, 2018.
  • User fees for IRS installment agreements — The user fees charged by the IRS for installment agreements are no longer permitted to be increased. For low-income taxpayers (taxpayers whose income falls below 250 percent of the poverty level) no user fee is to be imposed.
  • New tax return for older taxpayers — The Act required the IRS to generate a simplified tax return (called Form 1040SR) to be used by persons age 65 or older. The form will be similar to Form 1040EZ, but without restrictions based on amount or type of taxable income.

Disaster Tax Provisions

  • No early withdrawal tax for distributions related to California wildfires — There is no early withdrawal tax for up to $100,000 of early distributions (distributions made on a qualified retirement account, prior to age 59 and a half) if the distributions are qualified wildfire distributions. The distribution needs to occur on or after October 8, 2017, and before January 1, 2019. The distribution can be ratably included in taxable income over a three-year period.
  • Retirement plan withdrawal for canceled home purchases related to California wildfires — The Act provides for recontributing retirement plan withdrawals for home purchases or construction in the California wildfire disaster area. The recontribution will avoid any tax on the plan withdrawal.
  • Retirement plan loans related to California wildfires — Qualified individuals may take a loan from their qualified retirement plan of up to $100,000 (increased from a $50,000 loan threshold) and allows for a longer repayment term than is ordinarily permitted. The individual has to have lived in the wildfire area and sustained an economic loss.
  • California wildfires employee retention credit — The Budget Act affords a new employee retention credit to employers of up to 40 percent of qualified wages up to $6,000 for each qualified employee for a maximum credit of $2,400. The employer has to be located in the California wildfire disaster zone and the eligible employee wages need to be sourced to the wildfire disaster area.
  • Charitable contribution limitations deferred for donations to California wildfire relief efforts — The adjusted gross income limitation for individuals and taxable income limitation for corporations are generally suspended for qualifying charitable contributions. The contribution has to be made between October 8, 2017, and December 31, 2018, in cash, to a charitable organization, and is to be made for relief efforts in California wildfire disaster zone.
  • Modification of Hurricanes Harvey and Irma disaster areas — The Hurricanes Harvey and Irma disaster area definition has been expanded to mean an area with respect to which a major disaster has been declared by the president before October 17, 2017. This will allow a greater number of taxpayers effected in those areas to take advantage to disaster relief legislation passed in 2017.

For Further Information

If you would like more information about this topic or your own unique situation, please contact Hal S. Margolit, CPA, or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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