Deductions in Federal Budget Deal to Increase Amended Returns

April 27, 2018

The early bird gets the worm, or so they say. If you filed your 2017 federal tax return prior to February 22, you probably thought you were smart to have that work out of the way and, if you were due a refund, get some money in your pocket.

Problem is, the budget deal Congress reached in February 2018, which averted a government shutdown, also extended more than 30 deductions set to expire with 2016 tax returns, making them now deductible on 2017 tax returns as well. The IRS and companies that provide tax software scrambled to fix systems so that these retroactive deductions could be accounted for. On February 22, the IRS announced it was ready to process returns that included these extended deductions.

If you filed your 2017 tax return prior to February 22 and any of these deductions apply to you, you may want to file an amended return. Here are three such deductions causing many taxpayers to do just that.

Mortgage Insurance Premiums

If you bought a home and made a down payment of less than 20 percent of the cost, your financing company likely made you buy private mortgage insurance (PMI). In 2007, Congress changed the tax code to allow homebuyers a deduction not just for standard interest on the mortgage loan but for PMI as well. This deduction can be taken only by taxpayers who itemize and not those who take the standard deduction.

The PMI deduction is available to filers with adjusted gross incomes (AGI) of up to $100,000 ($50,000 for married filing separate). For AGIs over these thresholds, the deduction is phased out by 10 percent for each $1,000 ($500 for married filing separate) of AGI. Your AGI can be found on line 37 of your Form 1040 and on line 21 of Form 1040A.

Tuition and Related Educational Expenses

If you pay tuition and fees for yourself, your spouse or any dependents at an eligible educational institution, you can deduct up to $4,000. This deduction is available whether or not you itemize, but since it also reduces your AGI, it may make itemized deductions and tax credits more valuable.

Some income restrictions apply. Taxpayers with an AGI of up to $65,000 ($130,000 if filing a joint return) can claim the full deduction. Taxpayers with an AGI between $65,001 and $80,000 ($130,001 and $160,000 if filing jointly) can claim a $2,000 deduction. If your AGI is more than $80,000 ($160,000 if filing jointly), or if you’re married and file separately, you can’t claim this deduction.

Debt Forgiven on Principal Residence

The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income on their tax returns from the discharged debt on their principal residence. If you had debt forgiven because you restructured your mortgage, sold your home for less than the value of your mortgage to avoid foreclosure, or were actually foreclosed upon, you don’t need to claim this as income on your taxes. This provision applies only on your primary residence.

If any of these deductions applies to you, you may want to file an amended return. Amended returns can’t be e-filed, though. They must be completed and filed on paper. If you have questions or concerns, a trusted accountant can advise you about whether it’s worth the time and effort to file an amended return.

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