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Bipartisan Budget Act of 2018 Includes Extensive Tax Provisions
On February 9, Congress passed and President Trump signed into law the Bipartisan Budget Act (BBA) of 2018. While the main aim of the legislation was avoiding a government shutdown by increasing government spending limits and raising the debt ceiling, the BBA contains a large number of tax provisions, including special tax relief in response to the wildfires and hurricanes in 2017, the extension of energy tax incentive programs, modifications of certain provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, and the retroactive extension to 2017 of a range of tax incentives that had expired on December 31, 2016.
Among the extensions of tax provisions in the BBA that apply retroactively to 2017 only are tax breaks for homeowners, including provisions that allow taxpayers to exclude from gross income the discharge of qualified principal residence indebtedness following a foreclosure, short sale, or loan modification; and to treat mortgage insurance premiums as qualified residence interest.
The BBA also extends the above-the-line education deduction for tuition and fees that allows taxpayers to deduct up to $4,000 of tuition and enrollment fees for college for themselves or their dependents, provided their adjusted gross income falls below certain levels, and the tuition and fees were not paid from a tax-favored account such as a 529 college savings plan or a Coverdell Education Savings Account.
In addition, the BBA includes a large number of provisions related to energy production and conservation incentives. For example, the nonbusiness energy property credit for amounts paid for qualified energy efficiency improvements was retroactively extended for 2017. The BBA also extends through 2021, subject to phase-out, a residential energy property credit for 30% of the cost of fuel cells, small wind energy property, geothermal heat pumps, and solar electric and water heating property. Other provisions for energy expenses that expired at the end of 2016 but were retroactively extended through 2017 include a 30% credit for the cost of alternative fuel vehicle refueling property, a 10% credit for plug-in electric motorcycles and two-wheeled vehicles, credits for biodiesel and other renewable biofuels, a deduction for builders of energy-efficient commercial buildings, and a tax credit for builders of energy-efficient new homes.
The BBA also includes changes to the rules that govern hardship distributions in 401(k) plans that go into effect in 2019, including a repeal of the rule that prevents employees from making 401(k) contributions until six months after the date the hardship distribution was taken, the elimination of the requirement that account owners use available loans before taking a hardship distribution, and the repeal of the requirement that a hardship distribution be withdrawn exclusively from contributions, and not from investment earnings. In another retirement account-related change, the BBA allows individuals who experienced a "wrongful or improper" tax levy by the IRS against their IRA or other retirement account to roll the funds back into the account after the funds are returned.
The legislation provides a number of targeted tax benefits for victims of the California wildfires, including a provision stating that the 10% additional tax imposed on early distributions from a qualified retirement plan will not apply to any "qualified wildfire distribution" through the end of 2018. Taxpayers who receive qualified wildfire distributions are allowed to repay these amounts into a qualified plan within three years of the distribution without an early withdrawal penalty. The law also temporarily suspends the limits on deductions for cash contributions to a qualifying charitable organization for relief efforts in the California wildfire disaster area, and makes it easier for those who sustained an economic loss by reason of the wildfires allows to deduct their personal casualty disaster losses. The BBA further extends tax relief previously provided in the Disaster Tax Relief and Airport and Airway Extension Act of 2017 for hurricanes Harvey, Irma, and Maria to include disaster areas that were declared between September 21 and October 17, 2017.
In addition, the BBA reinstates a large number of provisions for businesses that expired at the end of 2016. In most cases, these provisions are reinstated for 2017, and are not currently in effect for 2018. These provisions include the extension of empowerment zone tax incentives, as well as specific tax incentives for employing members of Indian tribes and for conducting business activities on an Indian reservation. The legislation further extends provisions related to mining and railroad track maintenance; special expensing rules for qualified film, television, and live theatrical productions; and the Section 199 deduction for income attributable to domestic production activities in Puerto Rico.
Among the other notable provisions in the BBA is a provision mandating the creation of a new Form 1040SR, a special tax form for taxpayers over age 65 or older that is intended to be as simple as Form 1040-EZ, but that allows for the reporting of Social Security benefits and distributions from annuities and retirement plans. The new Form 1040SR is expected to be available for taxpayers to use starting with the 2019 tax year.