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mortgage

Ask the taxgirl: Should I get married?

October 22, 2009 · 6 comments

Taxpayer asks:

Last year, I moved in with my boyfriend at his condo. He lost his job so I paid most of the bills. I paid the mortgage direclty for most of the year. I also paid some of his credit card bills, the car payment and some of his child support paymnets so he didn’t get behind again. Can I take any of these things off on my taxes? Would it make a difference if we got married?

Taxgirl says:

You cannot deduct the cost of credit cards and car payments for personal use. Personal loans are never deductible.

Child support is likewise not deductible; in fact, child support is considered “tax neutral” (neither deductible to the payor nor taxable to the payee), unlike spousal support.

Mortgage interest is only deductible when you’re legally responsible for the note. Here, you’re clearly not since you indicated that it’s your boyfriend’s condo.

Now for the bigger question:

If you got married, it would only change the mortgage bit in terms of your deductions. Your husband would be able to take the mortgage interest deduction and charge it against your income. You’d also be able to claim an additional personal exemption against your income, assuming he’s still not working. Of course, this would not apply to last year – just this tax year if you got married by December 31, 2009.

I’m actually asked a lot whether it makes more sense to be married – or not – based on taxes. The answer is that it always depends on your situation from a tax perspective, though it tends, under the current system, to be more beneficial to file as married than single. Again, really facts and circumstances dependent.

That said, I run a business with my husband. And as I approach my own anniversary (it’s next week), I can honestly say that a business is not the same as a marriage. In business, you tend to make decisions that are largely based on dollars. In marriage, not so much.

This is not to say that financial decisions aren’t an important consideration in a marriage. It certainly is (you want to think about, for example, whether your potential spouse and you are compatible in terms of how you view money). But marriage is tough enough between two people: don’t drag Uncle Sam into it, too.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl

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Ask the taxgirl: Mortgage Forgiveness

March 8, 2009 · 0 comments

foreclosure.jpg

Taxpayer asks:

I have a 1099-c from a short sale on my house, I was hoping to be granted an exemption because of the Mortgage Forgiveness act of 2007, my amount in box 2 is 54809 and the amount in box 7 is 0.00 not sure what all this means.

Taxgirl says:

A form 1099-C is a form issued by a lender when a debt is forgiven. For forms 1099-C related to the forgiveness of debt related to real estate, the amount of debt forgiven is listed in box 2 (that’s the $54,809 you mentioned) and the value listed for your home is listed in box 7.

Normally, the forgiveness of debt results in income which is reportable and taxable on your federal income tax return. However, as you noted, the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) allows an exclusion up to $2 million (or $1 million MFS) of debt forgiven on your principal residence for qualified taxpayers. This applies to tax years 2007 to 2012.

To qualify, the debt must have been used to “buy, build or substantially improve your principal residence” and the mortgage must be secured by the principal residence. A re-fi used for those purposes would also qualify. However, to the extent that you used the proceeds from a mortgage or a re-fi for other things – like paying off personal debt or credit cards – the exclusion does not apply. Additionally, forgiven debt on second homes or business properties, car loans and other personal interest loans does not qualify under the MFDRA.

If you qualify, you must attach a completed federal form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (available here as a pdf), to your federal income tax return. Complete lines 1e and 2 to report indebtedness due to a foreclosure. If you kept your home but received a form 1099-C due to a modification in the terms of your mortgage, complete lines 1e, 2, and 10b.

I hope that helps.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook!

Image: Wikimedia, Creative Commons courtesy of Brendel

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Paulson Changes His Tune (Again)

December 5, 2008 · 6 comments

When Forbes magazine President and CEO Steve Forbes called Treasury Secretary Henry Paulson “the worst treasury secretary we’ve had in modern times,” it made for some good chuckles on late night television, but not many people seemed to pay attention. I have a feeling that will be changing.

Paulson keeps changing his mind, it seems, about how he wants to spend our money. Remember the financial institution bailout? The one where taxpayers basically handed out a big fat blank check to Paulson and his cronies? The one that set the stage for Congress now trying to be “responsible” when it comes to the Big 3 automakers?

Yeah, that one. Well, now there’s a very real possibility that some of that money will go directly towards bailing out borrowers. And according to CNN, taxpayers are a bit furious. And why wouldn’t they be? It’s the classic “not fair” scenario.

To quell the 2.3 million anticipated foreclosures in 2009, Paulson is considering a plan to buy more troubled mortgages and force mortgage rates lower. The kicker? The plan, financed by tax dollars, would only apply to those struggling with their mortgages – those who are continuing to make their payments on time will pay higher rates.

Nice, huh?

Now, don’t get me wrong. I don’t think anyone should be homeless. I don’t think anyone “deserves” to be forced out of their homes. But my husband and I, like millions of other taxpayers, made an economic decision when we bought our house. We were offered a mortgage package that was in excess of three times what we paid for our house. I’ll admit: I wanted the bigger house. I wanted a pool. And a great big fancy kitchen with Viking appliances. And at the time, my husband and I were both working at sizable law firms in Center City pulling down a considerable amount of money. We could afford it. But my husband looked at me and said, “What if something happens?” He was right (note that I’ll only utter those words infrequently).

“Something” did happen. In fact, lots of things did. It’s called life. We left our big law firms, opened a new business and eventually had three children that, for some reason, insist on eating and wearing clothes that fit. And while our disposable income dipped considerably, our mortgage payment stayed the same.

Are we lucky? Of course we are. I am typing this post from my nice (yet modest and affordable) home in Philadelphia with a hot steaming cup of coffee in hand. My children are still asleep (thank goodness) in their warm beds. I realize that we are blessed.

But I also realize that we were smart. We have made good decisions. We’ve made some bad ones, too (starting a business is not the easiest thing in the world). As a rule, though, we try to be thoughtful about how we spend our dollars and make more good decisions than bad ones.

And it’s with that understanding that I join the choruses of frustrated taxpayers who are angry over this latest proposal.

I also understand the perspective. Despite all of the media hype, most Americans are not spending blindly; they are changing their spending habits to adjust for the current economy. And although many Americans worry about losing their homes, the reality is that Bernanke says 15% of mortgages are in danger. That sounds like a huge number. But in the US, at the top end, about 75% of American families (not Americans) are homeowners. About half of American families that own homes have mortgages. And if 15% of those have mortgages under water… let’s do the math. That means, if you believe the worst case scenario, about 5% of American families with mortgages that are in danger. Is it a lot? Yes. Is it enough to justify the expenditure of gobs of taxpayer dollars? I don’t think so. And I’m not alone: there are even web sites now devoted to stopping the housing bailout.

As the economy continues to bobble, there are a number of fiscal emergencies fighting for dollars: the Big 3 automakers, jobless benefits, food stamps, health insurance. So far, none of those are getting the attention – or money – that the housing industry has managed to win.

And yes, I’ve heard the warnings about the housing market, how a mortgage fall out will bring down the entire US economy. I’m not totally convinced. Believe it or not, some economies have done well traditionally without a strong homebuyer’s market; Japan and Germany both have lower rates of home ownership than the US.

On the tax side, I’d rather see real incentives for American taxpayers to keep more of their own money. Continuing to put taxpayer dollars at risk (and yes, buying debt and loaning money for failed assets is risky) means that our national debt remains high. More borrowing means more dollars in interest paid out. The money has to come from somewhere – check your wallet. My guess is that’s where it’s coming from.

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Foreclosures, Debt Forgiveness and Mortgage Losses Explained

October 11, 2008 · 8 comments

There’s a lot of good discussion on the Fix the Tax Code Friday comments thread about debt cancellation and mortgage debt cancellation relief. I started to reply to one of the comments and thought it was best to make it a separate post so that it doesn’t get buried.

I wanted to clarify some misconceptions about debt cancellation and mortgage debt cancellation due to a foreclosure. Every instance of debt cancellation – even for mortgages – is not the result of a foreclosure. Mortgages are very fact and circumstance specific since they are negotiated according to state law, an individual’s income and other considerations.

The new (temporary) law regarding mortgage debt forgiveness excludes the cancellation from income in most cases; eligible debt includes mortgage balances on principal residences which totaled less than $2 million. It’s also worth noting that the extension of the new law for mortgage debt forgiveness through 2012 does not apply to home equity loans.

However, this doesn’t mean that the prior law included the entire debt burden as income in every instance. The old law (still on the books and will kick back in after the reprieve in 2012) worked as follows:

A foreclosure is, for tax purposes, like a sale. The bank does not simply take back your house and then report the entire amount of your mortgage as income. There are two parts to calculating taxable income, one to determine the cancellation of indebtedness income, and one to determine any taxable gain.

The first part, to calculate income associated with the forgiveness of indebtedness value, is as follows:
1, Calculate the total amount of indebtedness prior to foreclosure.
2, Calculate the total fair market value (FMV) of the home.
3, Deduct line 2 from line 1.

If the indebtedness is less than or equal to the FMV of the home, there is no resulting income to report. As an example, if I owed $375,000 on a $400,000 home, there is no taxable income to me. If I owed $400,000 on a $400,000 home, there is likewise no taxable income to me.

Income is realized when a borrower has taken out more than the home is worth but only to the extent that the debt exceeds the FMV of the home. This usually happens when: (a) borrower overpaid for the home; (b) housing market drops (often corresponding with a, above); or (c) borrower has borrowed/refinanced for more than the home was worth (often with two or more mortgages).

The reason that there is reportable income when a borrower takes out more than the home is worth is because the bank loses the difference. If I have borrowed against my home for $500,000 but the bank can only recover $400,000, there is a loss to the bank. The bank does get to claim the loss as a deduction. And since the Tax Code is premised on the idea that income should be matched with deductions, there is corresponding income to the borrower equal, more or less, to the bank’s loss ($100,000 in my example).

The second part, to figure capital gain or loss on a foreclosure, is as follows:
4, Take the smaller of 1 or 2 above.
5, Figure your adjusted basis for the property (cost + improvements)
6, Your gain or loss is the difference after subtracting item 5 from item 4.

Treat any gain from a foreclosure just as if you had sold the home. So, if you owned and used the home as your principal residence for at least two of the last five years prior to the foreclosure, you can exclude gain of up to $250,000 (or $500,000 for married couples filing jointly). Any gain over the exclusion amount would be treated as capital gain. And just like with any sale of a primary residence, a loss on a foreclosure is not deductible on an individual tax return. In other words, you wouldn’t pay tax unless you had a significant gain at the foreclosure.

And we’re not done yet! There are two important exceptions to the above: If your debt is discharged through bankruptcy, there is no taxable income to report. And, if you are declared financially insolvent, meaning that your debts exceed the FMV of your assets, you may exclude some or all of the forgiven debt from income.

Make sense? I think that there was an impression that homeowners got slammed twice under the old law in every circumstance. I realize it’s somewhat complicated but the bottom line was that under the old law, so long as you borrowed less than or equal to your current asset values, you did not fall into the debt forgiveness/reportable income “trap.”

The new law has been regarded as rewarding those people who over-borrowed. The existing law did not affect folks who owed less than or equal to the value of their homes – just those who owed more than the value of the home.

Of course, this is a quick and dirty explanation of the prior law. Be aware that each situation is fact specific. For more on cancellation of debt income, you can check out the IRS publication 544 or, of course, consult with your tax professional.

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Ask the taxgirl: Losses and Mortgage

29 July 2008

Taxpayer asks:
My mother in law has lost about 7000 in the past year with her stocks and bonds. She is thinking about taking them all out and paying off her mortgage. What kind of penalty will she pay and is there any additional IRS penalties that she is not aware of? Is there any way [...]

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Suddenly, being financially irresponsible pays off!

11 October 2007

The House Ways and Means Committee has voted to permanently remove the income tax consequences for homeowners whose debt is partially forgiven by a lender after a foreclosure. The bill is likely to pass the House and Senate, and President Bush has already spoken publicly about his approval of the measure.
Great. Now homeowners [...]

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Sharpen your pencils! School is in session.

9 September 2007

Remember that Staples ad where the parent runs down the aisle tossing school supplies into the cart while “It’s the Most Wonderful Time of the Year” plays in the background. That’s how I feel about this time of year.
As the parent of three children, I love back to school. I crave the sense of normalcy [...]

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Should we pay for the mistakes of others?

27 July 2007

Last night, while at a reception for BlogHer, I was asked whether I thought that the mortgage interest deduction for homeowners would be eliminated.
“Of course not,” I replied.
“Even with all of this sub-prime mortgage stuff?” the person pressed.
“It won’t be repealed,” I said, confidently.
But back in my room, I started thinking about [...]

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