By Ryan C. Wood
I always like to read what new laws are named and then read the law to find out what the law actually does and if the name is appropriate. The American Taxpayer Relief Act of 2012 or H.R. 8 raises taxes on anyone making over $400,000 and is single, and $450,000 if married. It also has a phase-out of tax deductions and credits for people whose incomes over $250,000 for individuals and $300,000 for couples. It also increases the amount estates totaling over $5,250,000 are taxed when someone dies from 35% to 40%. I have never been a fan of the death tax. The two-year old cut to payroll taxes was not extended. The payroll tax rate had been reduced from 6.2% to 4.2% for 2011 and 2012. That hurts all of us working stiffs out there each and every month. Take a look at your paycheck today. It is smaller than in 2012. So as a bankruptcy attorney I am asking where is the relief?
The Mortgage Debt Relief Act of 2007 was extended to January 1, 2014
At last there is bit of relief in this new law. Section 202: Extension of Exclusion From Gross Income of Discharge of Qualified Principal Residence Indebtedness. What does this mean? It means that if you house is foreclosed on in 2013 then the difference between what your home is worth and what you owe on the loan cannot be counted as taxable income just like in 2007 – 2012. When your home is foreclosed on or short-sold the bank that had the loan will issue a 1099-C or possibly a 1099-A for (C) cancellation of debt or (A) abandonment for the difference between the value of the house and what is owed on the loan. Of course most houses purchased recently are not worth what is owed on the loan. The cancellation of debt is not always taxable though. The cancellation of debt or difference is a taxable event unless it was (1) discharged in bankruptcy (2) you were insolvent at the time of the event (See IRS Form 982) OR (3) the house was your principal place of residence and the debt was incurred to buy, build or improve your principal residence or refinance that debt. See IRS Publication 4681.
So the extension to January 1, 2014, is definitely a positive and something that is unfortunately still necessary. The mortgage crisis is still ironing itself out. As a Bay Area bankruptcy lawyer I wish I could say there will not be quite a few foreclosures and short-sales this coming year, but there will be. There are even adjustable rate mortgages that are adjusting up let alone those who have watched the value of their homes decrease by one hundred thousand dollars or more the last few years. Relief from taxes on the cancellation of debt resulting from a foreclosure or short-sale is still necessary and is absolutely relief.