Given today’s contentious legislative environment, it’s not often that Congress passes anything. So when a bill actually is on track for approval, various members of Congress often try to tack on a number of provisions.
Such was the path of the new
Consequently, as we’re now in tax season, it’s worth dissecting the provisions individually to better understand how they may or may not impact our clients.
Since 2006, the
The ultimate objective of these IRMAA surcharges is to increase the total percentage of Part B costs that are covered by premiums, from 25% — that is, the amount covered by the base $134/month Medicare Part B premium — to as high as 80% for those paying the full $134 + $294.60 = $428.60/month premium.
Under the new Bipartisan Budget Act of 2018 though, an additional tier of surcharges is being introduced for 2019 at a MAGI threshold of $500,000 for individuals, or $750,000 for married couples. Notably, the threshold for married couples is only 150% of the threshold for individuals, introducing a sort of marriage penalty for high-income couples on Medicare. The new tier is intended to lift the Part B premium coverage from 80% to 85% for those high-income earners.
It’s also important to note that the new IRMAA tier for 2019 stacks on top of the changes to IRMAA tiers that just took effect in 2018 as a part of the
Thus, in the span of two years, the depth of the top IRMAA tiers has been expanded rapidly, while the bottom three IRMAA tiers have become compressed — albeit still with an individual threshold of $85,000 for individuals, or $170,000 for married couples, which means it only applies to a limited number of households.
TAX BREAKS REINSTATED
For much of the past decade, a handful of individual tax incentives have been regularly subject to a series of short-term extensions, after which they would lapse until/unless they were reinstated and extended again. In practice, this happened so often that they literally became known as the Tax Extenders.
In the
However, a handful of popular individual tax breaks were not made permanent under the PATH Act, and instead were only extended temporarily for two years, through the end of 2016, and lapsed as of December 31 of that year. Accordingly, the Bipartisan Budget Act
EDUCATION DEDUCTION
The above-the-line education deduction for tuition and fees allows taxpayers to deduct up to $4,000 of tuition and enrollment fees for college for themselves or their dependents. Any expenses claimed for the Tuition and Fees deduction cannot have been paid from an already tax-favored 529 college savings plan, a Coverdell Education Savings Account or via tax-free interest from a savings bond.
The Tuition and Fees deduction is partially phased out from a $4,000 maximum down to only $2,000 for individuals with modified adjusted gross Income above $65,000, or $130,000 for married couples, and is completely phased out once income exceeds $80,000 for individuals, or $160,000 for married couples.
Notably, the Tuition and Fees deduction also cannot be claimed on behalf of any student who already claimed the American Opportunity Tax Credit, or Lifetime Learning Credit, in the same tax year. And since the American Opportunity Tax Credit is actually a dollar-for-dollar credit for the first $2,000 of expenses, and 25 cents on the dollar for the next $2,000, it is always better
In practice, the reinstatement of the Tuition and Fees deduction will be primarily beneficial for:
- Students who are beyond their first four years of undergrad education or are in graduate school;
- Students/families with income above $56,000 when filing as individuals, or $112,000 for married couples, but under $80,000 and $160,000, respectively, where the Lifetime Learning Credit will be phasing out faster than the Tuition and Fees deduction; and
- Families with multiple students beyond the first four years of college, where the Lifetime Learning Credit can only be claimed once per tax return — i.e., per family with multiple students. Meanwhile, the Tuition and Fees deduction can be claimed across multiple students as long as the family remains below the income phase-out threshold.
However, the reinstatement of the Tuition and Fees Deduction is only for the 2017 tax year, and has already implicitly re-expired at the end of 2017, which means it is not currently available for the 2018 tax year. In addition, because the Tuition and Fees Deduction was just reinstated retroactively for 2017 as of February 9, some tax reporting software may not yet be updated for the retroactive change for 2017 tax filings. Though fortunately on
MORTGAGE INSURANCE PREMIUMS
Under
This deduction for mortgage insurance premiums was one of the tax extenders that was repeatedly extended, lapsed, extended again and lapsed again over the span of a decade, having last been extended
With the Bipartisan Budget Act of 2018, the mortgage insurance premium deduction
Notably, the reinstatement for deducting mortgage insurance premiums has no relationship to the
SHORT SALES
Under
However, the national decline in real estate that began in 2007, and that was accelerated by the financial crisis, threatened to trigger cancellation-of-debt income on a mass scale, as houses were foreclosed on in short sales across the country. To provide some relief for the situation, the
Unfortunately though, the original law was temporary, and expired and then was reinstated and extended several times since 2007 — most recently
And the Bipartisan Budget Act of 2018 has now retroactively reinstated it again for just the 2017 tax year.
In practice, this simply means that any homeowners who liquidated their primary residence — and it must be a primary residence — in an underwater-mortgage short sale in 2017 will not have to report the cancellation-of-indebtedness income that might have otherwise been due. Since the 2017 tax year is already closed, there’s no way to sell for the 2017 tax year if the transaction hasn’t already occurred, and as it currently stands the provision has once again lapsed for 2018, and may or may not be reinstated and extended again.
401(k) HARDSHIP DISTRIBUTIONS
Most 401(k) plans limit the ability of employees to take in-service distributions, limiting their ability to access the money until they actually retire — or at least separate from service — or
However, some employer retirement plans also allow employees to take a so-called hardship distribution, where the employee can take a distribution that is not a loan and without separating from service in situations of “immediate and heavy financial need” — e.g., sudden medical expenses, burial/funeral expenses for a family member, or even certain costs related to the purchase of a primary residence or for college costs, which
Long-only equity mutual funds report the first positive week in nearly a year.
To limit potential abuse of hardship distributions, employer retirement plans are permitted to decide whether to even offer such distributions, and have some latitude to define which “immediate and heavy financial needs” will be eligible under their plan. Additionally, hardship distributions can generally only be made from prior salary deferrals contributed to the plan — i.e., the $18,500/year contribution limit — but not the growth on those deferrals, or from employer profit-sharing or matching contributions. In addition, some employer retirement plans will only allow hardship distributions after the
Under the Bipartisan Budget Act of 2018 though, the
Notably though, the additional flexibility for 401(k) hardship distributions will not be automatic. Rather, it’s still at the employer’s discretion to update and amend the plan for 2019 to allow for the more flexible options, and the employer is free to entirely restrict greater hardship distribution flexibility.
Some other notable provisions of the Bipartisan Budget Act of 2018 include:
New Form 1040SR
The IRS is directed
Ability to Rollover Improper Levies Back to an IRA
In rare instances, the IRS finds it necessary to levy an individual’s retirement account directly to collect taxes that are due, and in some situations it turns out that the levy was unnecessary, as the taxpayer ends out paying by other means. In such situations though, the IRA funds — once withdrawn — were typically unable to be rolled over, as
Disaster Relief for Those Impacted by California Wildfires
In light of the horrible California wildfires that struck in late 2017, the Bipartisan Budget Act provides a number of retirement-plan–related and other relief provisions for those who were impacted — i.e., those whose principal place of residence from October 8 to December 31 was within the federal wildfire disaster area — including: the ability to recontribute any retirement plan withdrawals that were taken to purchase a residence where the purchase was cancelled due to the wildfires; an increase in the 401(k) loan limits to $100,000 or the full amount of the vested account balance for the rest of 2018 for anyone who suffered an economic loss, with the ability to delay loan repayments for a year; the ability to take an outright withdrawal of up to $100,000 from an IRA without an early withdrawal penalty, albeit still subject to normal income taxes, but able to be spread out over three tax years; the opportunity to claim the earned income or child tax credits based on prior-year earned income — instead of current-year earned income — if current-year (2017) income was lower; and increased casualty loss limits for those impacted by the wildfires, via the removal of the 10%-of-AGI threshold and ability to deduct even for those who don’t itemize.
In the end, the budget act was not intended to be tax legislation first and foremost, and to the extent that any tax provisions were included, most were temporary — from the reinstatement of various 2017 tax breaks to disaster relief for the California wildfires. Nonetheless, some provisions, such as the new IRMAA tier for high-income taxpayers, are permanent, and will remain relevant to taxpayers — and their advisors — for many years to come.
So what do you think? Do you have any clients who will be impacted by the provisions of the Bipartisan Budget Act of 2018? Please share your thoughts in the comments below.
