The recent bipartisan Congressional budget deal had an unexpected potential benefit for your wealthy clients: the extension of federal tax breaks (aka “extenders”). But rich clients should be prepared to rework their 2017 returns and wait longer for a refund.
These potential boons cover home debt, mortgage insurance premiums, higher-education expenses and energy-efficient home improvement, among others. These breaks expired at the end of 2016 but are effective for all of 2017 as a a result of the budget deal.
“Very few HNW individuals are aware of these extenders and the possible impact on their 2017 tax situations,” noted Raffaele Mari, a CPA and RIA in Corona del Mar, Calif.
Though fewer clients will be in a position to benefit, additional extenders that may apply to 2017 returns involve motor-sport racing tracks, costs of film and TV production, timber gains and mine-rescue training, young racehorses and depreciation for business property on Native-American reservations.
All of these extenders were made retroactive more than a month into 2018. Not surprisingly, “the IRS wasn’t prepared to react immediately to the new law,” Mari said.
The agency said Thursday that it’s ready to process returns claiming three of the most “popular” extenders:
• Your clients can exclude from gross income the discharge of qualified principal residence indebtedness (claimed on IRS Form 982), effective for debts discharged during 2017 or, if a binding written agreement was in effect by Dec. 31, for the foreclosure or short sale or other transfer of property. This extender might be of the most possible use to wealthy clients, said Morris Armstrong, an RIA at Armstrong Financial Strategies in Cheshire, Conn.
• Mortgage insurance premiums treated as qualified residence interest, generally claimed (if at all by HNW clients) on IRS Schedule A and that allows mortgage insurance premiums to be treated as deductible interest. (Note that, under reform, fewer taxpayers will likely itemize deductions.)
• Deduction for qualified tuition and related expenses, claimed on Form 8917.
One tax break is potentially more applicable to HNW clients who worked on their home last year: the $500 energy-efficient home improvements tax credit, a dollar-for-dollar reduction in tax liability of up to $500 for making energy-efficient home improvements such as new windows or upgraded heating or air conditioning equipment. (The IRS has not yet said it is ready to process returns claiming this extender.)