In a Nutshell
The $400 billion federal budget deal didn’t just determine how much the government will spend and borrow over the next two years. It also retroactively renewed about 30 expired tax breaks, including some that are good news for homeowners and college-goers. Here’s how the budget and renewed tax breaks could affect your 2017 taxes.This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma.
Filing taxes can be confusing, especially when you discover that a tax break you qualified for last year — and were counting on for this year — is no longer available.
Tax breaks can apply one tax year but expire in another. In fact, many of the individual tax breaks included in the tax reform bill passed in December 2017 will expire on Dec. 31, 2025. However, Congress can also choose to extend tax breaks through legislation. Often these so-called “extenders” get tacked on to must-pass legislation.
That’s how the Bipartisan Budget Act of 2018 renews some tax breaks that expired in 2016 and weren’t going to be available for your 2017 taxes. While some of the newly extended tax breaks benefit big business, others could help homeowners, students, and taxpayers who’ve purchased energy-efficient or earth-friendly products.
Here’s a look at some of the key expired tax breaks that the budget deal renews for your 2017 taxes.
FAST FACTS
Tax reform tax breaks that will expire in 2025 (or sooner)
The tax reform law passed in December 2017 made numerous changes to the tax code. However, many of the breaks for individual taxpayers that begin in the 2018 tax year are set to expire at the end of 2025 or sooner, unless Congress acts to extend or revise them before then.
These include …
The higher standard deduction of $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers will revert to 2017 levels of $6,350 for single filers and those married filing separately, $9,350 for heads of household and $12,700 for those married filing jointly.
The child tax credit increased to $2,000 per qualifying child, and the income eligibility limit was boosted to $400,000 for married couples filing jointly. For 2017, the credit was $1,000 per qualifying child with an income eligibility limit of $110,000 for those married filing jointly.
The medical expense deduction was previously limited to qualified medical expenses that amounted to more than 10 percent of your adjusted gross income. Tax reform lowered the threshold to 7.5 percent and made the change retroactive for your 2017 taxes. However, the lower threshold expires on Jan. 1, 2019.
The income limitation on itemized deductions was eliminated under tax reform but will revert to pre-reform limits at the end of 2025.
The exemption amount and phaseout thresholds for the individual alternative minimum tax have been temporarily increased. For those married filing jointly, the exemption amount is now $109,400, and $70,300 for all other individual filers. Phaseout thresholds are now $1 million for joint filers and $500,000 for all other individual taxpayers. The changes expire on Dec. 31, 2025. The amounts are indexed for inflation.
Deductions for private mortgage insurance premiums
When you buy a home with a down payment that’s less than 20 percent of the purchase price, your lender may require you to get private mortgage insurance. PMI protects the lender in case you stop making payments.
It’s common for your PMI premium to be a monthly charge that’s based on your loan value. Or you might have to make a one-time, up-front payment when you close on your new home. Sometimes PMI involves both an up-front payment and monthly premiums.
If you paid PMI in 2016, your premiums may have been an eligible deduction on your 2016 tax return (which you filed in 2017), provided you met the criteria for the deduction. However, that deduction expired on Dec. 31, 2016.
The budget deal renews the expired PMI deduction, and now you will be able to claim it on your 2017 tax return (which you’ll file this year) if you qualify.
The deduction treats PMI as home mortgage interest. To claim the deduction for PMI for the 2017 tax year, you must meet the criteria for claiming home mortgage interest, including the following:
- You must file Form 1040 and itemize deductions on Schedule A.
- You must be paying qualified mortgage insurance on a qualified mortgage that is a secured debt.
- The loan must have been taken out to buy, build or improve a primary or second home.
- You must use the home personally for a long enough period— you can’t just be a landlord.
There are limits on the mortgage insurance deduction if you have home acquisition debt or home equity debt. However, in most cases, you can deduct all your home mortgage interest. As long as you meet all the criteria, including the criteria listed above, you can claim the deduction up to the amount that your premiums cost. Your lender should provide information on Form 1098 about premiums paid.
Help for homeowners who had mortgage debt forgiven in 2017
Current and former homeowners who have faced trouble with their mortgage payments in the past also got a big break from the budget deal.
Generally, if a lender cancels or forgives a debt you owe them, you may have to report that amount as income for tax purposes. So if you’ve had some debt forgiven through a loan modification, short sale or foreclosure, the debt would typically be reported and taxed.
The Mortgage Forgiveness Debt Relief Act of 2007 made an exception and allowed homeowners to exclude discharged mortgage debt from gross income. The exclusion expired on Jan. 1, 2017, but the budget act restores the protection and extends it until Dec. 31, 2017, for debts discharged after Dec. 31, 2016.
Deductions for higher education expenses
The budget has good news for college students too. It extends the tuition and fees deduction that expired at the end of 2016.
The deduction allows you to reduce your taxable income by as much as $4,000 for qualifying education expenses for you, your spouse or a dependent, provided you meet all criteria:
- You must file Form 1040 or 1040A.
- The taxpayer claiming the deduction can’t have a status of married filing separately or be claimable as a dependent on anyone else’s tax return.
- The student must have been enrolled at or attended an eligible educational institution in 2017.
- Your modified adjusted gross income must not exceed $80,000 ($160,000 for joint filers).
- You can’t claim the American opportunity tax credit or lifetime learning credit for the same student in 2017.
- The expenses you’re claiming are tuition or fees required for the student to be enrolled in or attend a qualified educational institution. Fees could include books, supplies and equipment required by the institution for the student’s studies.
Tax credits for doing your part to save the planet
If you’ve invested to make your home more energy efficient or to buy an electric vehicle, you may benefit from multiple expired tax breaks that the budget deal restored. Many of the tax breaks provided for energy efficiency are tax credits, which are more valuable than deductions because they reduce your tax liability dollar-for-dollar.
Some of the valuable energy tax credits extended by the budget deal include:
- A credit for nonbusiness energy property, for 10 percent of the cost of qualified energy-efficient improvements (up to a lifetime maximum of $500) made to a principal residence, such as exterior windows (up to $200), doors and some roofs. (Installation costs don’t count.) The credit is extended for qualifying improvements made during 2017.
- Tax credits for up to 30 percent of the cost of installing new qualified solar electric systems, solar water heater, fuel cell property, small wind energy systems or geothermal heat pumps for your home. The budget deal extends this credit until Dec. 31, 2021.
- A tax credit for the purchase of a qualified fuel cell motor vehicle, for up to $4,000 for vehicles weighing 8,500 pounds or less, and $10,000–$40,000 for heavier vehicles.
- A tax credit for 10 percent of the purchase price (up to $2,500 maximum credit) for buying a new qualified two-wheeled or three-wheeled plug-in electric vehicle.
Bottom line
While the 2018 budget act will affect how the government spends in the future, it could also have a retroactive impact on your 2017 taxes. You may be able to benefit from the restoration of several expired tax breaks, including credits for energy efficiency and deductions for mortgage- and college-related expenses.
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.