Total austerity Armageddon - 3rd world status incoming for the middle class

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Tax break for struggling homeowners set to expire

By Les Christie | – 3 hours ago

The clock is ticking on a tax break that saves struggling homeowners from paying thousands of dollars to the IRS.

If the Mortgage Forgiveness Debt Relief Act of 2007 does not get extended by Congress by the end of the year, homeowners will have to start paying income taxes on the portion of their mortgage that is forgiven in a foreclosure, short sale or principal reduction.

So if you owe $150,000 on your home and it sells for $100,000 in a foreclosure auction, the IRS could tax you on the remaining $50,000. For someone in the 25% tax bracket, that would mean paying $12,500 in taxes on the foreclosure. Similar taxes would apply for forgiven amounts in short sales and principal reductions.

"People trying to do short sales are freaked out about it," said Elizabeth Weintraub, a real estate agent in Sacramento, Calif. "They're telling me they'll do whatever it takes to close by the end of the year."

Should the tax break expire, a large number of mortgage borrowers could be affected. More than 50,000 homeowners go through foreclosure each month. Meanwhile, the number of short sales has tripled over the past three years to a rate of about half a million a year. And, under the terms of the $25 billion foreclosure abuse settlement, roughly one million borrowers may have their mortgage debt lowered through principal reductions over the next couple of years.

"If there ever was a no-brainer in housing policy, this would be it," said Jaret Seiberg, a policy analyst for Guggenheim Securities.

Yet, Seiberg is skeptical the exemption will get extended. Now that the election is over, he thinks Congress will be heading into a "lame duck" session, with very little legislation will move forward through the end of the year.

In addition, the cost of the exemption could make it a point of contention, he said. The office of Sen. Max Baucus, who heads the finance committee, estimated the cost of a one-year extension at $1.3 billion.

Yet, others disagree. Tom Kolpien, the press secretary for Rep. Tom Reed of New York, said Congress will likely act before the end of the year. (Reed is currently pushing for the extension on the House Ways and Means Committee).

"Both parties, both houses of Congress agree it's good policy and it needs to get done," said Jamie Gregory, chief lobbyist for the National Association of Realtors, which supports an extension. "The hold up is the process. I'm confident it will get done. I just don't know how."

Even if Congress allowed the exemption to expire, not all borrowers with forgiven mortgage debt will take a tax hit. If the debt is discharged in a bankruptcy, no tax is due. And anyone who is insolvent -- meaning they have more debt than assets -- at the time the debt was forgiven -- would not have to pay the tax.

Also in some states like California, certain borrowers are protected against paying the tax because of the way the state treats foreclosures.
As if that wasn't enough:

If President Obama and Congress fail to act this year, an enormous, unprecedented tax increase will fall on American taxpayers starting on January 1, 2013. The Washington Post called the looming tax increase “Taxmageddon,”[1] and Federal Reserve chairman Ben Bernanke called it a “massive fiscal cliff.”[2]

This impending tax increase is mostly the result of the expiration of many long-standing policies that all expire at the end of 2012. President Obama and Congress should start working together now to prevent this massive tax increase rather than waiting until the end of the year. That would assure families, businesses, and investors that their taxes will not rise sharply as the economy is still staggering to its feet and show the voters that Washington really can get important things done—even in an election year.

Taxmageddon Is Huge

Taxmageddon is a $494 billion tax increase that strikes at the beginning of 2013. Under current law, tax policies in seven different categories will expire, and five of the 18 new tax hikes from Obamacare will begin.

These tax hikes will raise $494 billion in 2013 but will remain in place unless President Obama and Congress stop them. Taxpayers would see even bigger tax hikes in succeeding years as the tax increases raise more revenue as the economy grows.

Although these tax increases will not start raising new revenue until next year, they are having a negative impact on the economy today. Families, businesses, and investors need to know how much tax they will pay in the future before making important economic decisions. The uncertainty caused by Taxmageddon means they are stuck in neutral while they wait for President Obama and Congress to act. This is slowing job creation and stopping many of the millions of unemployed Americans from going back to work.

A tax increase the size of Taxmageddon for just one year is simply unprecedented. Usually tax and budget policies are evaluated on estimates over 10 years. A 10-year tax increase of Taxmageddon’s magnitude would be off the charts. By comparison, all the tax increases in Obamacare—itself an enormous tax increase—raise $502 billion over 10 years, which is almost as much as Taxmageddon will increase taxes just in 2013.

Taxmageddon’s Sources

Almost 34 percent of the tax increase from Taxmageddon comes from the expiration of the 2001 and 2003 Bush tax cuts. These cuts are best known for reducing marginal income tax rates, but they also reduced the marriage penalty, increased the Child Tax Credit and the adoption credit, and increased tax breaks for education costs and dependent care costs.

Another 25 percent of Taxmageddon comes from the expiration of the once-temporary payroll tax cut. The expiration of the patch on the Alternative Minimum Tax (AMT)—which would raise the income threshold over which families qualify for the AMT to prevent middle-income families from paying this tax that is only supposed to impact “the rich”—accounts for 24 percent of the total potential 2013 tax increase.

The remaining tax increases come in part from Obamacare, notably the start of the Hospital Insurance 3.8 percent surtax on wages and salaries over $250,000 and investment income over that amount. This is the most economically damaging tax in the law and the one that raises the most revenue.

Then there is the expiration of the tax cuts contained in the 2009 stimulus and the expiration of the “tax extenders,” a group of about 50 tax policies that are regularly renewed for a year or two. The current policy on the death tax also expires in 2013. That means the rate will rise from 35 percent today to 55 percent and the exemption will fall from $5 million to $3.5 million.[3] The expiration of full expensing of new business capital investments (deducting the full cost at the time of purchase) rounds out Taxmageddon.

Table 1 lists the revenue each category of tax hikes would raise just in 2013. The appendix lists each separate tax policy that falls under each category that expires or begins in 2013.

Act Soon

Congress and President Obama have developed a penchant for waiting until the very last minute to act on pressing tax legislation. In 2010, they waited until late December to extend the expiring Bush tax cuts for two years. At the end of 2011, they waited again until late December to extend the expiring payroll tax holiday. They should break themselves of this bad habit.

Instead, Obama and Congress should remove the uncertainty clouding jobs and family finances by removing the threat of Taxmageddon now. Businesses, families, and investors need to know as soon as possible that this massive tax increase will not hit them as they awaken on New Year’s Day 2013.

Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Appendix: Breakdown of Taxmageddon

Show references in this report

[1]Lori Montgomery, “‘Taxmageddon’ Looms at End of Payroll Tax Holiday,” The Washington Post, February 18, 2012, at (accessed March 14, 2012).

[2]Peter Schroeder, “Bernanke Warns Lawmakers Country Headed for ‘Massive Fiscal Cliff,’” The Hill, February 29, 2012, at (accessed March 14, 2012).

[3]A repeal of the death tax starting in 2010 was part of the 2001 Bush tax cuts. The law that extended all the other Bush tax cuts for 2011 and 2012 undid the repeal of the death tax and set it at its current 35 percent rate with a $5 million exemption. Because the death tax policy was changed from the original Bush tax cuts, it is treated separately.

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Comment by truth on November 9, 2012 at 7:28pm


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