Retroactive Tax Extenders, Why You May Be Owed a Refund On Your 2018 Taxes

Several changes to the tax law were finalized in the final days of 2019 and these changes are effective immediately, some of the changes are even retroactive to 2018. I covered the changes made under the Secure Act earlier, but along with the Secure Act, the ‘Taxpayer Certainty and Disaster Tax Relief Act of 2019’ was also signed into law. The heart of the ‘Taxpayer Certainty and Disaster Relief Act of 2019’ is the extension of previously expired tax benefits.

Mortgage Insurance Premium Deductibility

The deductibility of mortgage insurance premium commonly referred to as PMI, expired after 2017. However, Congress has now made PMI deductible as part of the mortgage interest deduction through 2020. The extension of the law also retroactively updates the 2018 tax rules, meaning if you paid mortgage insurance premiums in 2018, you’ll likely receive a refund by filing an amended tax return. You’ll need to send evidence of the mortgage insurance premium you paid along with your amended return. In most cases, your bank would have included your mortgage insurance premiums on your 1098 mortgage interest statement.

Note that the mortgage insurance premium deduction begins to phase-out for those with an adjusted gross income of $100,000 per year and is completely unavailable for those with a gross income of $110,000 or more.

Canceled Mortgage Debt Now Excludable From Taxable Income

Typically when a lender forgives one of your debts, they’ll send you a form 1099-C for cancellation of debt. If there are no exemptions available to you, the amount of debt canceled counts as taxable income to you. The cancelation of mortgage debt is common in situations involving short sales, foreclosures and mortgage modifications. The ability to exclude this debt from income had expired in 2017 but is now back from the dead. Again, if you counted canceled mortgage debt from your main home in 2018, you’ll want to amend your 2018 tax return to claim the retroactive exemption. The canceled debt will still need to report on your tax return, but Form 982 can be filed to exclude it from income.

Deduction for Tuition and Expenses Revived

Taking a deduction for college tuition and expenses had become less common after the introduction of generous and more beneficial college tax credits like the American Opportunity Credit. A taxpayer can choose to claim a credit or a deduction for eligible college expenses, not both. The American Opportunity Credit may only be claimed for the first four years of college per student and with more students staying in college longer than four years these days, taxpayers have started to utilize the deduction again. Like the other provisions above, the tuition and fees deduction expired in 2017, but is back again thanks to the late 2019 law. Again this deduction was made available retroactively to 2018.

Healthcare Expense Deduction

Eligible healthcare expenses can be deducted from your income. However, they are subject to a hurdle limitation based on income. The affordable care act established this hurdle at 10% of adjusted gross income. The way this works if you had $50,000 of adjusted gross income, you’d have to exclude your first $5,000 of medical expenses from income, everything over that $5,000 hurdle would count as a deduction. The Tax Cuts and Jobs Act temporarily lowered this hurdle to 7.5% for 2018. The recently passed law extends the 7.5% rate through 2020.

Federal Disaster Area Relief

Some tax relief is available to those who both live in a federally declared disaster area and suffered a loss from said disaster. These relate to retirement accounts. If certain time constraints are met, a taxpayer who qualifies for disaster relief may withdraw up to $100,000 from a retirement account and receive the following relief:

• No 10% penalty for early withdrawal
• Exempt from mandatory tax withholding
• May be treated as being withdrawn evenly over 3 years
• May be repaid within 3 years

Additionally, the Taxpayer Certainty and Disaster Relief Act of 2019 allows for up to $100,000 in retirement account loans(instead of the standard $50,000 max). Loan repayments may be delayed for up to one year.