February 9th Budget Bill Includes 2017 Retroactive Extenders

Thank goodness for the National Association of Tax Professionals! Today I received a cryptic message from the IRS that gave no details and made little sense:

IRS Statement on Retroactive Extender Provisions

Following is an IRS statement issued today, Feb. 9:

“The IRS is reviewing the legislation signed Feb. 9 that retroactively extended and modified numerous tax provisions covering 2017. We are assessing these significant changes in the tax law and beginning to determine next steps. The IRS will provide additional information as quickly as possible for affected taxpayers and the tax community.”

I immediately freaked out and thought, “What significant changes? For 2017? I’m already working on 2017 returns! Tell me more!”

Thankfully, I’m a member of NATP, which had sent out an email at exactly the same time, answering many of the questions I’d just asked. And unfortunately, it’s all true. Our government has decided to pass a 2017 tax extenders bill AFTER tax season has already started. AFTER the IRS has already released all their updated forms. AFTER the tax software companies have already programmed their systems. AFTER tax preparers have already completed their 2017 tax update educational coursework.

From NATP‘s Special Alert e-mail to members:

Newly-Passed Budget Bill Includes Retroactive Extenders
These could impact your clients’ 2017 tax return

This morning President Trump signed a budget bill averting yet another government shutdown. Tucked in the Bipartisan Budget Act of 2018 are several extender provisions that expired but are now available retroactively through Dec. 31, 2017.

The most notable extenders include:

Exclusion for discharge of indebtedness on a principal residence
The provision extends the exclusion from gross income of a discharge of qualified principal residence indebtedness through 2017. The provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged pursuant to a binding written agreement entered into in 2017.

Premiums for mortgage insurance (PMI) deductible as mortgage interest
The provision extends the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2017. This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000.

Above-the-line deduction for qualified tuition and related expenses
The provision extends the above-the-line deduction for qualified tuition and related expenses for higher education through 2017. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).

Three-year depreciation for race horses 2-years-old or younger
The provision extends the 3-year recovery period for race horses to property placed in service during 2017.

Also incorporated into the bill is a series of additional provisions that will go into effect for the 2018 tax year. The following are noteworthy:

Requirement for new Form 1040SR for seniors
The provision requires that the IRS publish a simplified income tax return form, designated a Form 1040SR, for use by persons who are age 65 or older by the close of the taxable year. The form is to be as similar as possible to the Form 1040EZ. The use of Form 1040SR is not to be restricted based on the amount of taxable income to be shown on the return, or the fact that the income to be reported for the taxable year includes social security benefits, distributions from qualified retirement plans, annuities or other such deferred payment arrangements, interest and dividends, or capital gains and losses taken into account in determining adjusted net capital gain. This provision is effective for taxable years beginning after the date of enactment.

Prohibition of modifying user fee requirements for installment agreements
The provision prohibits increases in the amount of user fees charged by the IRS for installment agreements. In addition, the IRS is required to waive the fees imposed for installment agreements for taxpayers whose income falls below 250 percent of the poverty line and have agreed to make the payments by electronic means through a debit account. Further, for those taxpayers whose income falls below 250 percent of the poverty line, are unbanked, and successfully complete an installment agreement, the fee would be reimbursed at the end of the installment agreement period.

Individuals held harmless on improper levy on retirement plans
The provision allows amounts, including interest, returned to an individual from the IRS pursuant to a levy to be contributed to the IRA, or employer-sponsored plan, without regard to normal contribution limits. In addition, the IRS is required to pay interest on an amount returned. The provision is effective for levied amounts, and interest thereon, returned to individuals in taxable years beginning after December 31, 2017.

The Joint Committee on Taxation released the estimated budget effects of the revenue provisions contained in the Bipartisan Act. With more than 40 tax provisions affected, we recommend that you find time during this busy season to review the tax summary of the bill.

And I couldn’t agree with them more.
Step 1: Join NATP if you’re a tax preparer.
Step 2: Review the extenders package. ASAP.

I’ve never seen an extenders bill passed after tax season has already started. This is irresponsible on the part of our government, and that’s not a political statement.

In the words of the Tax Foundation:

Retroactive changes like this are poor public policy and should not be expected to contribute to long run economic growth. Further, this is not a productive way to build on a tax reform bill designed to improve the tax code. Businesses and individuals have already made their decisions for 2017 and cannot go back and choose to invest differently in light of the new tax breaks—and counting on regular tax break extensions when planning ahead is no longer a sure bet. The uncertainty surrounding tax extenders is one of the most persistent features of tax policy discussions, and that should change.

However, it’s our job as tax preparers to make sure we’re looking out for our clients. So, even though the organizers we sent them don’t mention PMI or tuition deductions, let’s make sure to ask these additional questions to clients as their return prep work makes it into the office. And let’s hope the IRS and software preparers can get those lines and others back on the forms before too many more returns are filed.

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