Here is a brief description of three actions taken by Congress on January 1, 2013 that may affect our Legal Shield members
By Attorney Melissa Morris
For Another Year, Forgiven Mortgage Debt Will Not be Taxed. (Debt Relief Act.)
When a homeowner is unable to pay the mortgage on a principal residence, it is sometimes best for the owner to try to sell the home and apply the sales proceeds to the amount owed. If the sales price does not cover the entire amount of the mortgage, the bank will sometimes agree to accept a “short sale.” In the best case for the homeowner, the bank will agree to accept the proceeds of the sale to pay off the entire debt, and will forgive the difference. Before 2007, the amount “forgiven” by the bank was considered to be taxable income to the IRS. So, a homeowner who owed $150,000.00 on his home, and was able to sell it for only $100,000.00 would then have taxable income of $50,000.00 if the bank agreed to forgive that sum. At a very low tax rate of 17.4%, that’s still a tax bill of approximately $8,500.00 for someone who did not even have enough money to pay his or her mortgage!
In 2007, Congress passed the 2007 Mortgage Debt Relief Act which temporarily cancelled this tax burden. It was set to expire December 31, 2012, but has been extended by Congress for another year. That’s very good news for tax payers! The Debt Relief Act only applies to a loan used to purchase or improve a principal residence. To learn how this law may apply to you, call us at Davis Miles and we will be happy to discuss it with you.
Estate Tax Exemption
If you called Legal Shield any time during 2012 to discuss potential estate taxes, you might have received a reply to this effect: “Your guess is as good as ours. Call us back in 2013.”
On January 1, 2013 Congress did address this issue with a “permanent” solution. “Permanent” only means that it will not automatically expire at any time in the future. Congress can always change it, but may be content to let this issue lie for quite some time.
For 2013, the exemption will be $5.25 million. In future years, the exemption will be the same, adjusted for inflation. Therefore, in 2013 a married couple can actually leave $10,500,000.00 without incurring an estate tax, BUT ONLY IF the surviving spouse files an estate tax return at the time of the death of the first spouse and elects to carry over any of the exemption not used by the deceased spouse.
Also, an individual can give away up to $14,000 to any recipient in 2013 (adjusted according to inflation in later years) without a gift tax return being required and without using up any of his or her combined $5.25 million gift and estate tax exemption. There are several related issues to this law that may affect you, and good estate planning is always a wise thing to do. Call us at Davis Miles to discuss any tax or estate planning questions you may have.
Tax on sale of Primary Residence
The $250,000 tax exemption ($500,000 for married couples) in certain circumstances on capital gains from the sale of a principal residence was extended until the end of 2013.