One of the last things Congress took care of before adjourning was to renew some important tax breaks. We admit that we didn't think this would happen, but it did: Tax breaks that expired on Dec. 31, 2013, were renewed retrospectively for 2014. The result is that tax liabilities will be lower for some of the people who need the help the most.
Perhaps the most important break for our purposes is the mortgage debt forgiveness exception. Until the moment the law was signed, homeowners who had opted for a short sale or mortgage restructuring over foreclosure during 2014 would have had to report the amount forgiven as income. The added income could have kicked some homeowners into a higher tax bracket -- a double whammy, again, for people who really couldn't afford it.
We have discussed the mechanics of this tax break before. Before the foreclosure crisis, the IRS considered any savings from a restructured home mortgage to be "income." This was new money to the homeowner, not debt relief. With the Mortgage Forgiveness Debt Relief Act of 2007, though, the rule changed to allow the IRS to count the savings as debt relief.
The same logic applied to short sales -- when a bank allowed a homeowner to sell his house for less than he owed, the IRS considered that money in the homeowner's pocket.
While we are over the worst of the foreclosure crisis, we still know homeowners here in Illinois who just can't afford their homes anymore. A short sale is cheaper in the long run for the lender, the homeowner and even the buyer, but it is not a "gift" to the homeowner. It is an economic necessity.
The important thing to remember is that the exception only applies to mortgages on primary residences. And, the exception is capped at $2 million.
College students and their families can also breathe a sigh of relief: The deduction for tuition and fees was also extended through 2014.
There are other extenders, and we may review them quickly next week. In the meantime, we extend our best wishes for a happy and prosperous 2015 to our readers in Illinois and beyond!
Forbes, "10 Expired Tax Provisions That Might Affect You In 2014," Kelly Phillips Erb, Nov. 24, 2014
IRS, "Tax Season Opens As Planned Following Extenders Legislation," Dec. 29, 2014