For many individuals, tax reform is just a topic of conversation or even a politically charged issue, but for tax preparers gearing up for the upcoming tax-filing season without knowing if some tax provisions will remain expired or be retroactively extended for 2017, it has a direct impact on their job duties. So a brief discussion of the expired provisions as well as some other relevant 2017 provisions can provide a helpful review.
ISSUES FOR 2017
Filing Dates. The filing deadline for individual income tax returns and the first estimated tax payment is Tuesday, April 17, 2018, rather than April 15. This date change has become more common. This year it’s because April 15 falls on a Sunday and April 16 is Emancipation Day, a holiday celebrated in the District of Columbia. Per the IRS, even if you don’t reside in the District of Columbia, the returns aren’t due until the next business day.
The Highway and Transportation Act of 2015 (HATFA) extended the filing date for calendar-year corporations to the 15th day of the fourth calendar month (i.e., April 15), a one-month extension. The filing deadline for June 30 fiscal-year corporations wasn’t extended. That’s still the 15th day of the third calendar month (i.e., September 15). Since September 15, 2018, is a Saturday, the actual due date is September 17, 2018. If the one-month extension was given to fiscal-year corporations, their filing date would have been October 15, which is after the end of the government’s September 30 fiscal year.
An automatic six-month extension is available for individuals by filing Form 4868. Corporations must file Form 7004 to request an automatic extension. Depending on the corporation’s tax year, the extension may be either six or seven months. HATFA §2006(c) increased the automatic three-month extension for calendar-year corporations to be six months for tax years beginning after December 31, 2015. But to equalize the total time frame for filing tax returns by corporations, June 30 fiscal-year corporations were given an automatic seven-month extension.
Qualifying Widow(er). Beginning in 2017, the rules for a surviving spouse to file as a qualifying widow(er) in the two years after the spouse’s death are amended by Prop. Reg. §1.2-2 (REG-137604-07) to conform to the amendments made by the Working Families Tax Relief Act of 2004. The proposed regulations remove the reference to the tax return of a surviving spouse being treated as a joint return and the requirement that a taxpayer maintain a principal place of abode for a dependent. As a result, a surviving spouse can use the “Qualifying Widow(er)” filing status as long as he or she could have claimed a child or stepchild as a dependent but didn’t because that child (1) had too much gross income, (2) filed a joint return, or (3) could be claimed as a dependent on someone else’s return. In addition, the surviving spouse is now able to claim the “Qualifying Widow(er)” filing status if a dependent parent shares a principal place of abode with the taxpayer or if the parent’s household was maintained by the taxpayer for the entire taxable year.
IRA Conversion to Roth IRA. Another issue of tax reform discussions is whether to complete an IRA conversion in 2017 or wait until 2018. For those wanting to convert but also wanting to hedge their bets, one approach is to complete an IRA to Roth IRA conversion in 2017, then wait to see what happens in 2018. If the value of the converted assets drops in 2018 or tax rates are lower due to tax reform, then the converted assets can be recharacterized back to the IRA in 2018. Currently, the taxpayer simply waits until at least 30 days have elapsed since the initial conversion date and then reconverts the IRA back to the Roth IRA. The net result is the converted funds are taxable in 2017 if the taxpayer doesn’t recharacterize and reconvert, or taxable in 2018 if the taxpayer recharacterizes and reconverts in 2018.
myRA Phasing Out. The U.S. Treasury Department announced on July 28, 2017, that the myRA program wasn’t cost-effective. As a result, Treasury has discontinued the program and is no longer accepting new enrollments. Existing accounts will remain open, however, and owners can continue to manage their accounts and make contributions for the moment. Treasury is currently notifying existing myRA owners of the changes and supplying information on how they can move their myRA funds into another Roth IRA.
These provisions for individual taxpayers expired in 2016 and thus can’t be used for the 2017 tax year.
Tuition and Fees Deduction. Prior to 2017, a taxpayer could claim an above-the-line deduction for up to $4,000 for qualified tuition and fees paid on behalf of the taxpayer, a spouse, or their dependents. The $4,000 deduction limit was phased out if the taxpayer’s adjusted gross income (AGI) exceeded $65,000 ($130,000 joint return). And a $2,000 deduction limit was established for those taxpayers with an AGI between $65,001 and $80,000 ($130,001 and $160,000 joint return). No deduction was available for all other taxpayers, including those electing a file status of married, filing separate or those individuals whereby the personal exemption deduction could be claimed by another taxpayer.
Mortgage Insurance Premium Deduction. In general, personal interest isn’t deductible for individual taxpayers. One exception to this was provided in IRC §163(h)(3)(E) for mortgage insurance premiums paid by taxpayers with an AGI below or equal to $100,000 ($50,000 for married, filing separate) and phased out by 10% for each $1,000 ($500 for married, filing separate) for an AGI amount more than $100,000.
Principal Residence Discharge of Indebtedness. IRC §108(a) provided that, under certain circumstances, gross income doesn’t include amounts that would be a taxable discharge of indebtedness. This provision was limited to $2 million of forgiven acquisition mortgage debt of a taxpayer’s principal residence. This provision applies to debt discharged before January 1, 2017, or subject to an arrangement entered into and evidenced in writing before January 1, 2017.
Medical Expense Floor. As part of the 2010 Patient Protection Affordable Care Act, the 7.5% threshold for taxpayers claiming medical expenses was increased to 10%, with a special exception for taxpayers age 65 or older by year-end. The special exception retained the 7.5% threshold for these taxpayers for tax years 2013 through 2016. Therefore, all taxpayers, regardless of age, are subject to the 10% threshold level beginning in 2017.
Residential Energy Property Credit. IRC §25C provides a $500 credit for certain energy-saving improvements to a taxpayer’s principal residence. This on-and-off tax credit for nonbusiness energy improvements expired for any expenditures installed by a taxpayer after December 31, 2016.
Finally, one must remember that although these tax provisions are expired for 2017, there’s always the chance that they could be resuscitated by Congress and the President.
© 2017 A.P. Curatola