As tax season approaches for Washington residents, many are expecting a hefty tax returns. Others, however, may be stuck with a nasty and unexpected tax bill because certain financial policies have expired. A tax exemption that kept many from bankruptcy expired at the end of 2013, leaving many homeowners with massive tax bills because of debt forgiveness.
Scores of homeowners benefited from policies designed to help those who were deemed "underwater" -- that is, the amount owed on their mortgage was higher than the value of their homes. More than 6.4 million homeowners are still in this situation.
Many Americans were able to avoid filing for bankruptcy because of a large tax exemption that allowed them to pursue short sales on their homes; that is, they were permitted to sell the home for less than the value of the mortgage and then write off the remainder. Now, though, that amount is considered income and is accompanied by associated taxes.
One man said he owes $250,000 on his mortgage loan, but he has located a buyer for his home. That buyer is willing to pay $150,000. The remaining $100,000 would have been written off under the tax forgiveness plan. Now it is considered income, and the man is facing a $28,000 tax bill that he cannot pay. Statistics show that the average beneficiary of that tax exemption received a debt reduction of about $37,000, which would prompt a $9,250 tax bill without the forgiveness.
Homeowners facing this situation say they hope national lawmakers retroactively extend the tax break, a practice that has been used in the past. Experts say that legislators should not be deceived into thinking the economy has recovered so much that the tax exemption is no longer needed.
Homeowners who want to learn more about their financial options, including filing for bankruptcy, may be able to get additional information from a Washington attorney. These professionals may help clients determine their eligibility for homestead exemptions and other exemptions that could benefit them during bankruptcy.
Source: The Boston Globe, "Homeowners who received debt relief may face large tax bills" Shaila Dewan, Feb. 08, 2014