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Federal Employees News Digest : Feb. 11, 2013
February 11, 2013 Vol. 62, No. 28 7 Visit us on the Internet at www.FederalDaily.com The American Taxpayer Relief Act of 2012 (the Act)---recently passed into law by Congress as part of the "fiscal cliff " agreement---brought back two key homeowner tax benefits. These tax benefits had expired as of Dec. 31, 2011. This column dis- cusses the homeowner tax deductions that qualify- ing homeowners will be able to take on their 2012 and 2013 tax returns, and examines a law benefiting homeowners who are "underwater" in their mort- gages and were perhaps forced to do "short sales". This law was also due to expire as of Dec. 31, 2011, and was renewed by Congress as part of the Act. The first homeowner tax benefit discussed is the mortgage insurance premium. Millions of Americans pay mortgage insurance premiums or guarantee fees on their FHA, VA, Fannie Mae, Freddie Mac or Rural Housing loans. The primary reason they pay mortgage insurance premiums is that their "loan to value" ratio (the ratio of their mortgage balance to the fair market value of their home) is more than 80 percent. Mortgage lenders require mortgage insurance on such real estate in order to financially protect their interest. The Act allows homeowners who paid mortgage insurance premiums during 2012 to write off the insurance premiums paid provided the homeowner's adjusted gross income (AGI) during 2012 does not exceed $110,000. The deduction will also be allowed for 2013. Mortgage lenders report to homeowners on Form 1098 the mortgage paid and mortgage premiums paid during the year. For 2012, home mortgage interest and points reported on Form 1098 are listed on line 10 of Schedule A, while mortgage insurance premiums paid during 2012 is listed on line 13 of Schedule A. The second homeowner tax benefit discussed involves a tax credit for energy-related improvements. Homeowners who did some energy-efficiency renovations to their homes during 2012 may be able to claim a $500 tax credit on Form 5695. This is because of the revival of a home improvement incentive that lapsed on Dec. 31, 2011. Energy-efficiency renovations include insulation installation, energy-saving windows, doors, roofing and non-solar water heaters. While $500 does not sound like much, note that the $500 is a tax credit and not a tax deduction. As such, the $500 is deducted from one's 2012 federal tax liability. Also, there are no AGI limitations for claiming the $500 credit. The third piece of favorable tax legislation applies to those homeowners whose mortgage debt was partly or entirely forgiven during tax year 2012. Cancellation of indebtedness income is nor- mally includible in income. But the Act reauthorizes the Mortgage Forgiveness Debt Relief Act of 2007, which had been scheduled to terminate on Dec. 31, 2011. Before passage of this act, those homeowners who received principal reductions on their mortgages, or homeowners who participated in "short sales" in which the mortgage lender accepts less than the full amount owed on the mortgage as part of a sale, would owe federal tax on the full amount forgiven, as if it were regular income. The following are 10 facts that the IRS has issued about mortgage debt "forgiveness." 1. Any individual other than a married individual filing separate may exclude up to $2 million of debt forgiven on a principal residence. 2. The excludible limit is $1 million for a married person filing a separate return. 3. Debt reduced through mortgage restructuring as well as mortgage debt forgiven in a foreclosure may be forgiven. 4. To qualify, the debt must have been used to buy, build, or sub- stantially improve one's principal residence and be secured by that residence. 5. Refinanced debt proceeds used for the purpose of substantially improving a principal residence also qualify for the exclusion. 6. Proceeds of refinanced debt used for other purposes -- for example, pay off credit card debt - do not qualify for the exclusion. 7. Those individuals who qualify for the exclusion claim the exclu- sion by filling out IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) and attaching it to their federal income tax return. 8. Debt relief on second homes, rentals property, credit cards or car loans does not qualify for the exclusion. 9. Individuals whose debt is reduced or eliminated receive from their lender Form 1099-C (Cancellation of Debt). 10. Homeowners who receive 1099-Cs should examine them to make sure all the information presented is correct and notify their lenders if anything on the 1099-C form is incorrect But there are some negative aspects to the Act as it affects home- owners and individuals, including limits on deductions for mort- gage interest, property taxes, charitable contributions and other write-offs for single filing individuals with AGI over $250,000 and married joint filers with AGI above $300,000. Additionally, Congress is considering major tax reform this spring, with the mortgage interest and other real estate deductions prominent among the targets. This means that in the near future - perhaps starting in 2014 - there may be additional limits imposed on the mortgage interest and real estate property tax deductions. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor New tax law preserves tax benefits for homeowners for 2012 and 2013
Feb. 4, 2013
Feb. 18, 2013