Article Highlights:

Deduction for Mortgage Insurance Premiums
Exclusion of Principal Residence Indebtedness Forgiveness Income
Residential Energy Property Tax Credit
Above-the-line Deduction for Tuition & Related Expenses
More Favorable Kiddie Tax Computation
Alternative Fuel Vehicle Refueling Property Tax Credit
Qualified Fuel Cell Motor Vehicle Tax Credit
2-Wheeled (Motorcycle) Vehicle Tax Credit
Tax Credit for Building New Energy Efficient Homes

You may be one of the many taxpayers eligible for a refund from their 2018 tax return. Last December, tacked on to an Appropriations Act, Congress passed the long-awaited extenders bill. This bill had been lingering in Congress for about 2 years and extended several beneficial tax provisions that had expired after 2017. As a result, these provisions were retroactively extended to 2018 and most are continued through 2020. This opens the door to amending your 2018 return for a refund if any of the following provisions apply to you. Here are the retroactive tax benefits:

Mortgage Insurance Premiums – Mortgage insurance is generally required if a borrower makes a down payment of less than 20 percent of the cost on the purchase of their home. Although premiums are paid by the borrower, insurance protects the lender from losses if the borrower were to default on the loan. For FHA loans, borrowers must pay a mortgage insurance premium. These premiums are generally deductible as home mortgage interest when a homeowner itemizes deductions. To be deductible, the insurance premiums must be for an insurance contract issued after December 31, 2006 insuring loans for the purchase of a first or second home or for the refinance of those loans. However, the deductibility of these premiums begins to phase out for higher-income taxpayers when their AGI (adjusted gross income) exceeds $100,000 ($50,000 for married taxpayers filing separately) and is fully phased out if the AGI exceeds $109,000 ($54,500 for married taxpayers filing separately).
Discharge of Qualified Principal Residence Indebtedness Exclusion – When an individual loses their home to foreclosure, abandonment, or short sale or has a portion of their loan forgiven under the HAMP mortgage reduction plan, they generally end up with cancellation of debt (COD) income that is taxable unless the taxpayer can exclude it based on specific provisions of the tax code. For example, a taxpayer can exclude their COD income to the extent they were insolvent immediately before the event occurred by using the insolvency exclusion.

After the housing market crash more than 10 years ago, Congress added the qualified principal residence COD exclusion, which allowed taxpayers to exclude up to $2 million ($1 million if married and filing separately) of COD income to the extent it was discharged debt used to purchase the home (not equity debt).

This COD exclusion was temporarily added in 2007 but expired at the end of 2017. Luckily, those who had home purchase debt forgiven and paid taxes on that forgiven debt in 2018 may very well be able to amend their 2018 returns to exclude that COD income and get a refund of the taxes paid on the COD income.
Residential Energy Property Credit – The residential energy property credit provides for a 10% non-refundable credit eligible property costs (does not include installation costs) with a lifetime credit of $500. Energy savings property includes certain energy-efficient insulation materials, asphalt roofing with appropriate cooling granules, metal roofing with appropriate pigmented coatings, exterior windows, skylights, storm doors, air circulation fans, air conditioning, furnaces and hot water heaters. However, there are also per-item lifetime credit limits:

o Qualified Windows & Skylights: $200
o Qualified Advanced Main Air Circulating Fan: $50
o Qualified Hot Water Boiler: $150
o Qualified Energy-Efficient Equipment: $300

Example: You installed an energy efficient furnace in 2018. The cost of the furnace itself without the installation costs is $4,000. The credit is the lesser of $400 (10% of $4,000) or $300; but if you’d installed other energy-efficient equipment in any prior year since this credit first became available in 2006 and claimed a $200 credit at that time, you would have only $100 remaining of the lifetime credit allowance, and your credit for 2018 would be limited to $100.
Above-the-line Tuition & Related Expenses Deduction – A deduction from your income for tuition and related higher education expenses (if not used for education credits) is allowed, even if you don’t itemize your deductions. The maximum deduction is $2,000 or $4,000 depending upon your AGI. This deduction is totally phased out for taxpayers with an AGI of more than $80,000 ($160,000 for married taxpayers filing jointly). For example, if you are in the 12% tax bracket, a $4,000 deduction would net you a $480 refund.
Kiddie Tax – Tax reform changed how the income of dependent children is taxed, causing a child’s unearned income to be taxed at fiduciary rates that very quickly reach the maximum tax rate of 37%. That change created an unintentional tax increase for survivors of service members and first responders who died in the line of duty (because the death-related payments their children receive are considered unearned income). Because of this, Congress retroactively changed the kiddie tax computation back to the way it was before the tax reform change.

This allows a child’s return for 2018 to be amended to use the old method of taxation if it provides a better outcome, which will usually be the case if the child received survivor’s benefits in 2018 and can provide a substantial refund. In the case of other children subject to the kiddie tax, both methods will need to be figured to determine whether amending the child’s return is appropriate.
Alternative Fuel Vehicle Refueling Property Credit – The credit is 30% of the cost of the refueling property divided between business and personal use. The following are the credit limitations:

o Personal use is limited to $1,000 per home and is a non-refundable personal credit allowed against the regular tax and the AMT (alternative minimum tax).

o Business use is limited to $30,000 and is a general business credit reported on Form 3800; any amount of the credit not used in 2018 will carry back to 2017 and then forward to 2019.

This will provide a substantial tax credit for those who installed refueling property in 2018.
Qualified Fuel Cell Motor Vehicle Credit – Although rare, the purchase of a qualifying fuel cell vehicle in 2018 can provide a considerable tax credit. A qualifying fuel cell vehicle is one that is propelled by combining oxygen and hydrogen to generate electricity. This credit is not limited to passenger vehicles but also applies to big rigs used in business. The credit is based upon the gross vehicle weight rating (GVWR) of the vehicle:

o $4,000 – GVWR not more than 8,500#
o $10,000 – GVWR > 8,500# but < 14,000#
o $20,000 – GVWR > 14,000# but < 26,000#
o $40,000 – GVWR > 26,000#
2-Wheeled (Motorcycle) Vehicle Credit – Although most bikers are not looking for a quiet ride, there is an electric vehicle credit equal to 10% of the cost (maximum credit $2,500 per vehicle) of electric-drive purchased motorcycles with a battery capacity of at least 2.5 kilowatt hours, weight less than 14,000 pounds, and highway capability of 45 mph. If you purchased an electric motorcycle in 2018 that meets these requirements, you can amend your return for a tax credit of up to $2,500.
Credit for Building New Energy Efficient Homes - Provides a building contractor with a credit of $2,000 for site-built homes and $1,000 or $2,000 for manufactured homes that meet certain energy savings requirements (energy savings 30-50% for manufactured homes and 50% for site-built homes).

If any of the situations above apply to you for 2018, please contact this office so an amended return can be prepared to claim your refund.

Frequently Asked Questions

You can prepare your taxes yourself, especially if your business is simple.

But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.

Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.

That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.

Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.

Possibly, if it was truly for your business and you have proof.

Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.

Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.

The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.

Are You Eligible For a 2018 Tax Refund?

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