On December 20, 2007, George W. Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007. Below is an outline of major provisions of the Act.
Discharge of Indebtedness of Principal Residence from Gross Income:
Cancellation of debt (COD) in general creates income. COD is excludable from income if it occurs in bankruptcy or to an insolvent borrower, but only to the extent of insolvency. However, the Mortgage Relief Act excludes from gross income of a taxpayer any discharge of indebtedness income by reason of discharge of qualified principal residence indebtedness. Qualified principal residence indebtedness is similar to the definition used to determine whether one can deduct mortgage interest and is limited to $2,000,000 (or $1,000,000 in case of married individuals filing separate returns). The provision only applies to the taxpayer’s principal residence and not a second or vacation home. Effective for discharge of indebtedness on or after January 1, 2007 and before January 1, 2010.
The Act also provides a basis reduction in the individual’s principal residence (but not below zero) to the extent that amounts are excluded from income as a result of these provisions. The Act extends the deduction for private mortgage insurance (which was set to expire December 31, 2007) to amounts paid up to December 31, 2010.
Effective for sales beginning in 2008, the Act extends the time a widow/widower has to sell his/her principal residence and be eligible for the $500,000 exclusion available to joint filers. To qualify, the sale must occur not later than two years after the date of death. Prior to this provision, the sale had to occur in the year of death.
Penalty for Failure to File Timely Returns:
To make this bill revenue neutral, Congress included provisions to increase penalty on partners who fail to file timely returns. The Act added the new Code Section 6699, which imposes a penalty for failing to file S corporation returns in a timely fashion. The penalty imposed is $85 multiplied by the number of shareholders multiplied by the number of months (up to a maximum of 12 months). The Act does provide a “reasonable cause” exception. Effective for returns required to be filed after December 20, 2007.
On December 26, 2007, George W. Bush signed into law the Tax Increase Prevention Act of 2007, legislation that alleviates an immediate AMT hit on millions of middle-class taxpayers. To accomplish this, the Act increases the alternative minimum tax exemption amount for 2007 to $66,250 for married individuals filing joint returns or $44,350 for single filers. Without this change, the exemption amount would have been $45,000 for joint filers and $33,750 for single filers. As the Act was passed late in 2007, the IRS has stated that early return filers will see a delay in getting their tax refunds.
You can find additional information on the IRS website: www.irs.gov
Parveen Maheshwari is a Certified Public Accountant. His office is located in Burlingame, CA and can be reached @ 650-340-1400 or firstname.lastname@example.org