Tom Kelly: Some tax extenders bring more confusion than help

The Bipartisan Budget Act of 2018 was the spending bill passed in February to prevent a federal government shutdown. While the bill targeted federal spending, it also extended 30 tax breaks and provisions.

Most of the breaks did little for consumers, which was probably the reason it passed so quickly. For example, a seven-year recovery period for motorsports entertainment complexes passed. Did legislators really view this as a huge bonus for taxpayers? A headscratcher on the housing front was the extension to exclude the discharge of qualified principal residence indebtedness from gross income, especially given the many overheated markets around the country.

When there is low inventory and tons of buyers, prices go up – the basic law of supply and demand. Thus, there are fewer foreclosures and short sales because appreciation typically floats all boats and makes up for any financial mistakes. Yet, legislators saw the need to extend this benefit that should have been nixed two years ago.

Here’s how it works. Typically, when a home is sold as a foreclosure or a short sale, the amount netted in the sale is less than the amount of the debt. The difference, while “forgiven” by the lender, comes back to the taxpayer as income. For example, let’s say Barbara buys a house for $500,000. She makes a down payment on the house and borrows $400,000 to pay for the rest. Three years later, Barbara loses her job and must sell the house and move. To further add to her troubles, the housing market tanked in her town and the house is worth $300,000 while Barbara owes $395,000 on the loan.

Even if she sells the house for $300,000, she would pay off only $300,000 of the loan and still owe $95,000. She would be “short.” Most of the time, especially during mortgage meltdown, lenders approved the short sale, forgave the $95,000 and moved on. The Internal Revenue Service, however, views the debt forgiveness as income.

The Bipartisan Budget Act of 2018 extends the ability to exclude the forgiven debt as income for tax year 2017. To qualify, the debt must be on a primary residence and not a second home, investment or rental property. The exclusion may not help many taxpayers, but it should help more than those looking for help on motorsport entertainment complexes.

“The extenders with the greatest benefit are centered on housing,” said Rob Keasal, certified public accountant in the firm of Peterson Sullivan PC. “There’s the ability to deduct mortgage insurance premiums as mortgage interest, the above-the-line deduction for qualified tuition and related expense; and the credit for residential energy property.”

Here is a capsule of Keasal’s top three, plus four more:

Mortgage insurance premiums. The Budget Act extends the treatment of mortgage insurance premiums as qualified residence interest to premiums paid or accrued in 2017. This is effective for any amounts paid or accrued after Dec. 31, 2016.

Tuition and fees deduction. The above-the-line deduction for qualified tuition and related expenses is extended to tax years beginning after Dec. 31, 2016. Taxpayers may be able to deduct qualified higher education expenses paid during the tax year. The maximum deduction is $4,000 and is taken as an adjustment to income, meaning taxpayers can claim it without having to itemize deductions.

Energy credit. The 10 percent credit for qualified nonbusiness energy property is extended to property that was placed in service in 2017.

Energy-efficient home credit. The credit for new, energy-efficient homes is extended through 2017 for homes acquired after Dec. 31, 2016. The credit can be $2,000 if the home meets the 50 percent energy-efficient standard or $1,000 if the home meets the 30 percent energy-efficient standard.

5. Solar and thermal energy property. The budget act extends solar and geothermal energy property to include property that is built between 2017 and 2021.

6. Energy-efficient deduction. The deduction for energy-efficient consumer buildings is extended to property that was placed in service in 2017.

7. Charitable contributions for disaster relief efforts. Cash contributions made between Oct. 8, 2017, and Dec. 31, 2018, for California wildfire disaster-relief efforts are excluded from applicable charitable contribution limits. Charitable contribution deduction generally can’t be more than 50 percent of your adjusted gross income, but sometimes 20 percent and 30 percent limits apply. Contributions made for relief efforts are not subject to these limits or the overall limit on itemized deductions. Contributions are also eligible for carryover treatment if they exceed this limitation.