The Republican National Convention is now behind us and the Democratic version is set to conclude Thursday, and while this might have you thinking there will be an entertainment void in the coming weeks, the truth is that the real fun starts when these idealistic celebrations are in the rear-view mirror. I’m referring to the beginning of the debate season (though I would have accepted the start of the NFL regular season as well), when we can hear the candidates mix it up and offer retorts to each other’s grandiose claims.
The debates usually give ordinary citizens like you and me a chance to ask the candidates questions as well, and one question that I’m sure a lot of people would like answered is what will become of the mortgage forgiveness tax break that has helped lower the financial burden on so many people since 2007.
As you may or may not know, forgiven debt that exceeds a certain amount is actually taxable in most cases. That means if you fall behind on your credit card or loan payments and reach an arrangement with the bank to essentially write off a portion of what you owe (something is often better than nothing in a lender’s mind), you’ll likely receive a 1099 form in the mail sometime thereafter. Not only will this added tax basis rain on your savings parade, but during tough times it can even prove to be the straw that breaks your bank account’s back, landing you in trouble with the IRS and/or necessitating that you declare bankruptcy.
Just imagine the kind of havoc that unexpected sizable tax bills could wreak on the economy if they’re assessed to thousands of people across the country all at the same time. That’s what prompted Congress to pass the Mortgage Forgiveness Debt Relief Act of 2007. This law – together with the Emergency Economic Stabilization Act of 2008, which extended its provisions through 2012 – exempted debt forgiven as a result of short sale, foreclosure, or mortgage forgiveness arrangement from being taxed, offering a modicum of relief to those who found themselves unable to make payments or in possession of a property with diminished value following the housing market collapse.
It’s due to expire at the end of the year, unless another extension is passed, however. And consumers across the country are scrambling as a result, trying to finalize proceedings related to their underwater mortgages in order to meet the deadline and garner important savings in the process.
At this point, you might be curious about just how much this tax break stands to save distressed homeowners. Well, let’s say you had $50,000 forgiven by your mortgage lender as part of a short sale –not an amount out of the realm of possibility – and you’re in the 25% tax bracket. Without the Mortgage Forgiveness Debt Relief Act of 2007, you’d be looking at paying an additional $12,500 in taxes. I don’t think it takes a rocket scientist to realize that someone who cannot afford their mortgage and is looking to strike a deal with their bank will have trouble coming up with $12,500 in cash to pay the IRS.
Ultimately, there is some light at the end of the tunnel. President Obama has already released a proposal to extend the tax break through 2014, and before adjourning for the summer the Senate Finance Committee approved a bipartisan bill that would keep it in place at least through next year. Much is obviously left to be decided, but one thing is clear right now: the housing market mess is taking a long time to sort out, and failing to extend tax relief would seem to run counter to the law’s original spirit as well as complicate an already difficult situation.