It was no big surprise that the debt-tax exemption was extended until January 1, 2014 yesterday. It was part of the latest Congressional boondoggle – here is an excerpt from HW:
One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31.
The fiscal cliff deal extends it for another year, meaning homeowners who experience a debt reduction through mortgage principal forgiveness or a short sale are exempt from being taxed on the forgiven amount.
“The amount extends up to $2 million of debt forgiven on the homeowner’s principal residence,” Compass Point Research & Trading said. “For homeowner’s to qualify, their debt must have been used to ‘buy, build, or substantially improve’ their principal residence and be secured by that residence. The law, which was passed in 2007 with a 5-year sunset provision, will now be in effect until Jan. 1, 2014.”
One of the best benefits hidden in the mess was the increase in the estate-tax exemption, which was set to revert to a 55% tax on everything over $1,000,000. Here is the new version, from the WaPo:
Although the tax rate will rise from 35 percent to 40 percent, estates worth as much as $5 million — $10 million for married couples — will go untaxed. And an inflation adjustment will guarantee that the size of the exemption will grow to $15 million for couples by the end of the decade.
At least it’s behind us for now?
JtR, Did you see that mortgage interest deductions will now be limited?
I think this + prop 30 will cool off the $1.5m to $3.0m range significantly once everyone realizes how significantly they are affected.
What do you think?
http://www.cnbc.com/id/100348786
Excerpt:
Among the tax breaks lost for higher incomes are itemized deductions for mortgage interest. Those will now be capped for individuals making more than $250,000 and couples making more than $300,000.
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This can’t be good for people who live in CA and own property since they already get hammered on AMT wrt to CA income and property tax. Now they’ll lose the mortgage deduction also.
Yet more reason, if any were needed, to pay down / off your mortgage.
Thanks for the contribution FuturesWatcher!
It should get more attention around April 15th, when the tax man tells the rich folks that they better prepare for impact next time around.
The self-employed folks can juggle a few things to keep under $300,000 if they were just barely over in 2012, but yes, the mega-earners will be ticked.
But are they not going to buy a house? It probably won’t keep them renting, but it might stop a few who already have a decent CV home, and are thinking of moving up to those new Pardee tracts in Carmel Valley.
I agree that it will temper enthusiasm for the move-up buyers. CV is many dual W-2 earners who will be affected the most plus new stock compensation limits ability to time the stock-based income that is popular with Sorrento Valley jobs. We are deciding on renovate vs. move up vs. move out. Move out gets more popular every day.
When we add in all the new taxes and increases, my family’s effective tax rate will be around 50%. Not such a happy New Year!!
From wsj:
The housing industry also dodged a bullet on a big issue—potential limits on itemized deductions, including the cherished mortgage-interest tax break. Last year, there was talk among politicians in both parties of capping those deductions at a particular level, and Republican presidential candidate Mitt Romney suggested several options, ranging from $17,000 to $50,000. But those limits did not come to pass as part of the fiscal cliff deal.
The pact does restore some limits on deductions that had been in place in the 1990s. But they apply only for individuals earning above $250,000 per year and couples earning above $300,000.
These limits reduce how much high-income taxpayers can claim for mortgage interest and other deductions. For example, a couple with a combined income of $350,000 would see their total itemized deductions fall by $1,500. That results from a formula that reduces the amount that can be deducted by 3% of the difference between the taxpayer’s income and the deduction cap. (In this case, $1,500 is 3% of the $50,000 difference between $300,000 and $350,000.)
However, analysts still believe the mortgage-interest deduction could be altered as Congress continues to look for ways to save money. “While the mortgage interest deduction avoided a direct hit this time around, we doubt it will…dodge Congressional scrutiny going forward,” Mr. Boltansky wrote.
http://www.taxpolicycenter.org/press/press-resources-pease.cfm