Many individuals file their income tax returns as quickly as possible so they can get their refunds faster, avoiding the crunch that hits around the April 15 deadline.
This year there is a glitch for the early tax filers: The budget deal that ended the government shutdown in February also extended the 2016 expiration of more than 30 tax provisions to Dec. 31, 2017 — including three that affect a sizable number of individuals. Both tax-preparation software companies and the IRS have had to scramble to update their software programs for these retroactive changes.
As a result, early filers who are eligible to claim these deductions will need to file an amended federal tax return (Form 1040-X) and possibly an amended state income tax return. Moreover, amended tax returns, unlike the current tax return, cannot be electronically filed.
These are the three tax breaks you may now be eligible to claim on your 2017 tax return.
Qualified tuition and related expenses
This deduction of up to $4,000 applies to those paying qualified tuition and fees at an eligible educational institution on behalf of the taxpayer, spouse or their dependents. It is available to both those who take the standard deduction and those who itemize because it is an “above the line” adjustment (i.e. deduction). Because it is “above the line,” it also reduces a taxpayer’s adjusted gross income (AGI) figure, which in turn can make itemized deductions and tax credits more valuable.
However, it has some income restrictions.
The full $4,000 deduction is limited to those taxpayers with an AGI of $65,000 ($130,000 joint return) or less. A $2,000 deduction is available for those taxpayers with an AGI between $65,001 and $80,000 ($130,001 and $160,000 for those filing a joint return). No deduction is available for those taxpayers with an AGI more than $80,000 ($160,000). There is no phase out for this deduction; a person can claim the full deduction amount only if they are within the AGI range.
No deduction is available for married taxpayers who elect to file separately
Mortgage insurance premiums
Those who made a down payment of less than 20% of the cost of their home pay mortgage insurance, or PMI. Beginning in 2007, the tax code was amended to allow a deduction for the cost of the mortgage insurance as home interest but only to those who itemize; those who take the standard deduction aren’t eligible.
This deduction also comes with income limits. It is available to those with an AGI below $100,000 ($50,000 for married filing separate). However, this deduction is phased out by 10% for each $1,000 ($500 for married filing separate) of AGI amounts above those thresholds. For example, a person with an AGI of $110,000 isn’t able to claim this deduction.
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Debt forgiven on a qualified principal residence
This provision, which also dates back to 2007 and the collapse of the housing bubble, is limited to $2 million of forgiven acquisition mortgage debt of a taxpayer’s principal residence. This includes debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure.
This exclusion from a taxpayer’s gross income reduces a person’s AGI, so it may likewise increase one’s itemized deductions and increase some tax credits.
The tax break doesn’t cover forgiveness of equity lines of credit debt or acquisition mortgage debt of a taxpayer’s secondary residence.
The IRS announced on Feb. 22 that it is now ready to process returns for the 2017 tax year that claim any of these breaks. However, individuals who plan to claim any of these items need to verify that their tax preparation software has been updated to include these items.
Of course, anyone who filed a tax return before Feb. 22 will need to file an amended tax return to claim any of these benefits. Unfortunately, amended tax returns are not eligible for IRS e-filing; they must be paper filed and sent by snail mail.
As always, you should consult a qualified tax adviser before making any decision involving federal and state income taxes.