Benefits of the New (and Extended) Tax Laws for 2013

Much has been written about the last-minute passage of the "fiscal cliff" issues by the federal government.  But, remember there are state level issues as well, some of which are still being worked on in California., specifically SB 30.

In 2007, the new law provided, for five years, incentives for sellers to accept short sales by, in many instances, forgiving taxes that would have been due for the forgiven debt amount.

Previously, when a lender forgave a portion of borrower debt, the forgiven amount was, in many instances, considered taxable income for the borrower.

This tax incentive for sellers to participate in short sales was just extended by Congress for another year, expiring January 1, 2014; however, California's exemption under the Mortgage Forgiveness Debt Relief Act expired at the end of 2012, and currently forgiven mortgage debt is taxable state income.  SB 30 (Calderon) has been introduced, and if and when passed by the California legislature, it will make California conform to federal law, and will be retroactive to January 1, 2013.

Not all debt is forgiven in every instance. Sellers should check with their tax consultant for exceptions. For example: Maximum amount that can be forgiven is $2,000,000. To be forgiven, the debt must have been used to buy, build or substantially improve their principal residence

Other housing-related provisions brought into effect with the new laws are:

• A 10% tax credit up to $500 for homeowners' energy improvements to an existing home, and is retroactive for 2012.
• Capital gains rates remain at 15% for incomes under $400,000 (individual) and $450,000 (joint); above those income levels gains will be taxed at 20%.  On sale of principal residence, the gains rate remains at $250,000 (individual) and $500,000 (joint).
• An 2011 expired tax deduction for mortgage insurance premiums (MIP and PMI on loans) has been restored and is retroactive through 2012.
• The new "Pease Limitations", per California Association of Realtors, are at "$300,000 for married taxpayers filing jointly and $250,000 for single taxpayers (i.e., a married couple with an AGI of $400,000 would be $100,000 over the threshold; the couple’s deductions would be reduced by $3,000 which is 3% of $100,000). No matter how high a taxpayer's AGI, the Pease reduction cannot exceed 20 percent of the amount of itemized deductions otherwise allowable for the year." These were named after Ohio Congressman Don Pease and were first enacted in 1990.
• The first $5 million dollars in individual estates and $10 million for family estates are now exempt from the estate tax. After that, the rate will be 40%, up from 35%. The exemption amounts are indexed for inflation.
• More at http://www.toptennewhomecommunities.com/blog/fiscal-cliff-bill-addresses-some-key-housing-issues/

The Fiscal Cliff - or Tax Breaks That Could Be Gone

At the end of 2012, depending on what happens between the political parties, there could be many expiring tax provisions that originated in the George W. Bush Administration, when 2012 was the sunset year for so many breaks.

Federal income tax rates are scheduled to increase in 2013, with tax brackets currently spread from 10%-35% changing to 15%-39.6%. Long term capital gains will increase from 15% to 20%, and other long term capital gains tax rates which apply to qualifying dividends will be taxed as ordinary income.

The 2% reduction in the payroll tax  for Social Security will expire, something which concerns many businesses.

Estate taxes will return to 2001 and the $1,000,000 exclusion for taxes, and the top tax rate increases from 35% to 55%.  (In 2001, there weren't nearly as many $1,000,000 properties to inherit as there are now.)

Earned income tax credits, child tax crfedit and the Hope tax credit will revert to lower limits.

Student loan interest will no longer be deductable after the first 60 months of repayment.

Have you been affected by the Alternative Minimum Tax? the exemption amounts will be lowered, affecting many more individuals (a tax that was only supposed to affect the highest income earners has been affecting more and more of the middle class).

Will tax rates for income earners under $200,000 or $250,000 (households) annually change, or will the tax rates for the vast majority of Americans be impacted as well?

And, once again, there are issues about the "debt ceiling", and what measures may have to be enacted in order to allow the government to meet its obligations.

The Mortgage Debt Relief Act is also set to expire; this act is what allows short sale sellers and individuals who took out a mortgage in a certain time period and were foreclosed on under certain conditions to not be taxed on the forgiven or cancelled debt. Should this Act not be extended, the tax burden of many distressed sellers will be increased.

And, last but not least, there is the issue of whether the mortgage interest deduction will continue and in what form--In California 89% of those who took the mortgage interest deduction earned less than $200,000. Losing the deduction would cost the average California taxpayer over $3,900.

Are you concerned? I hope you are and that you contact your Congressional representative to express your opinion.

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