(ARA) – When your home is losing value and your family is facing the financial stress of foreclosure, the last thing you need is to be hit with an enormous tax bill. The Mortgage Forgiveness Debt Relief Act of 2007 helps protect Americans facing foreclosure from higher taxes while they attempt to refinance a home mortgage.
This temporary act creates a three-year window for some homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. This means if the value of your home drops and your bank or lender forgives a portion of your mortgage, the federal government won’t treat that amount as taxable income. This exclusion only applies to discharges made after 2006 and before 2010. Additionally, the basis of the principal residence must be reduced (but not below zero) by the amount excluded from gross income.
‘To claim mortgage tax forgiveness on your 2007 tax return, taxpayers need to complete IRS Form 982 – Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment),’ says Stephanie Behrends of 2nd Story Software, makers of the popular TaxACT tax preparation software and online services. However, because it wasn’t until late December that lawmakers signed this legislation into law, the IRS only just started accepting the Form via e-file on March 3.
‘TaxACT Standard, our completely free tax preparation program that prepares federal income tax returns, and our premium TaxACT Deluxe software edition both include Form 982 as part of the software package,’ she adds. Because not all taxpayers whose homes have been foreclosed are eligible to claim mortgage tax forgiveness, it may be necessary to consult a tax professional or attorney prior to submitting Form 982 to the IRS.
Courtesy of ARAcontent