3 home tax breaks in jeopardy
Homeowners could be left hanging, not knowing if they'll owe big federal tax bills in 2014, if Congress fails to renew three important tax benefits set to expire at the end of 2013.
The Mortgage Forgiveness Debt Relief Act: When you go through a foreclosure, short sale or principal reduction, this law keeps you from owing federal income tax on the amount your lender forgave. If it’s not renewed, you could owe income tax on any debt your mortgage lender erases.
The private mortgage insurance (PMI) deduction: You use this deduction when you have mortgage insurance (that’s typically anyone who put down less than 20% on a home purchase) and you earn $109,000 or less in adjusted gross income. Congress has let this deduction lapse in recent years and then retroactively renewed it at some point the following year.
Home energy-efficiency upgrade tax credits: You can get a tax credit for up to 10% of the cost of improvements that make your home more energy efficient, including insulation, storm windows and doors, or a new roof, water heater or HVAC system. It's capped at $500, but since it's a credit, it offsets what you owe in taxes dollar-for-dollar.
Homeowners aren’t the only ones who want the tax provisions renewed. When Congress allowed the debt forgiveness provision to expire last year, the attorneys general of 42 states pushed for renewal.
The loss of the exemption would almost certainly hurt the 1.28 million U.S. homeowners currently in foreclosure.
The debt forgiven by a short sale can be significant, running into hundreds of thousands of dollars. And even for a family in the lowest tax bracket, the income tax on that much income would be a significant amount of money.
There’s also been talk, but no action taken, about eliminating or restricting the mortgage interest deduction as a way to help narrow the federal budget deficit.
It's a popular deduction for middle-income homeowners who itemize deductions and among younger home buyers who are most often in the early years of their mortgage, when interest payments are highest.
It's unlikely that Congress would risk alienating middle-income homeowners by completely eliminating the mortgage interest deduction. It’s possible the deduction would be reduced or limited in some way, perhaps by limiting its use by couples earning more than $250,000 or for second homeowners.