My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.


By Topics

Overall:
0. About (10)
1. My Progress (139)
2. Car & Home (107)
3. Credit (138)
4. Banking (33)
5. Saving (49)
6. Investing (308)
7. Taxes (89)
8. Spending (74)
9. Misc (97)
A. Archive (49)



MONTHLY ARCHIVE

Feb 2014 (3)
Jan 2014 (6)
Jan 2012 (1)
Apr 2011 (1)
Mar 2011 (1)
Feb 2011 (1)
Jan 2011 (1)
Dec 2010 (1)
Oct 2010 (1)
Sep 2010 (1)
Aug 2010 (1)
Jul 2010 (1)
Jun 2010 (1)
May 2010 (1)
Apr 2010 (1)
Mar 2010 (6)
Feb 2010 (2)
Jan 2010 (7)
Dec 2009 (3)
Feb 2009 (4)
Jan 2009 (8)
Dec 2008 (1)
Jun 2008 (2)
May 2008 (2)
Apr 2008 (5)
Feb 2008 (3)
Jan 2008 (15)
Dec 2007 (32)
Nov 2007 (6)
Oct 2007 (8)
Sep 2007 (9)
Aug 2007 (24)
Jul 2007 (2)
Jun 2007 (1)
May 2007 (3)
Apr 2007 (4)
Mar 2007 (4)
Feb 2007 (13)
Jan 2007 (6)
Dec 2006 (3)
Nov 2006 (7)
Oct 2006 (7)
Sep 2006 (6)
Aug 2006 (4)
Jul 2006 (10)
Jun 2006 (1)
May 2006 (3)
Apr 2006 (2)
Mar 2006 (6)
Feb 2006 (6)
Jan 2006 (3)
Dec 2005 (1)
Nov 2005 (9)
Oct 2005 (8)
Sep 2005 (13)
Aug 2005 (25)
Jul 2005 (16)
Jun 2005 (17)
May 2005 (19)
Apr 2005 (20)
Mar 2005 (24)
Feb 2005 (23)
Jan 2005 (36)
Dec 2004 (40)
Nov 2004 (34)
Oct 2004 (17)
Sep 2004 (21)
Aug 2004 (59)
Jul 2004 (37)
Jun 2004 (31)
May 2004 (29)
Apr 2004 (52)
Mar 2004 (49)
Feb 2004 (49)
Jan 2004 (31)
Dec 2003 (48)
Nov 2003 (52)
Oct 2003 (29)
Sep 2003 (8)
Aug 2003 (5)
Jul 2003 (2)
Jun 2003 (2)
May 2003 (5)
Apr 2003 (2)
Mar 2003 (2)
Feb 2003 (3)
Jan 2003 (29)



 

Christmas Gift from the Capitol Hill: the Alternative Minimum Tax Patch and Mortgage Forgiveness Debt Relief

Contributed by mm | December 25, 2007 5:40 AM PST

taxman.jpgThe Congress's Christmas gift for the middle class: several last minute tax law changes that temporarily addressed the tax on forgiven mortgage debt and Alternative Minimum Tax (AMT).

If you don't want to be buried in the Congress's literature of the Tax Increase Prevention Act of 2007 and the Mortgage Forgiveness Debt Relief Act of 2007, you may read the excellent summary at CCH.

And here is the PFBlog analysis:

One-Year Band-Aid for Alternative Minimum Tax (AMT)

The problem our legislators need to resolve is simple: when they first introduced the Alternative Minimal Tax in 1970 to compel the riches to pay a minimal tax, they didn't allow for inflation adjustment in the amount of exemption. After that many years of inflation, the original exemption amount looks ridiculously low and, if adopted, will let AMT hit over 20 millions taxfilers who are normally considered as "middle class."

Both parties have agreement that this would be unfair, but in order to lift the exemptions for permanent inflation indexing, they need to find other sources of reliable revenue (read: assessing more tax elsewhere), and that's where it gets stuck.

It has been becoming an annual ritual that every year, both parties cannot agree on a long-term fix and can only end up with a temporary patch. What's different this year, is our Congressmen couldn't realize this until just before the Christmas, after IRS already printed out next year's tax forms and programmed its software according to the original law, and unfortunately people are now pointing fingers about who should be blamed for potential delays in tax return processing due to the last minute tax law change.

Mortgage Forgiveness Debt Relief

Unlike AMT, which is a long-term headache in the Capitol Hill, the taxation on mortgage forgiveness is a new problem for 2007, when the housing crash becomes more prevalent and pushing more families over the edge.

According to the tax law in the past, if your lender forgives a certain amount of your debt, that amount is considered taxable ordinary income to you. Question is: for debt-laden families, first, is it morally right to ask them to pay cash on the "phantom income?" And second, how can they find cash to pay the tax bill without falling deeper in the hole?

Technically, the tax on phantom income is not wrong -- debt forgiveness is a transfer of wealth and should be considered as income. However, our lawmakers feel the current situation is too bad for some (ex-)homeowners that they deserve to be rescued. Therefore, it is enacted that for the three years starting in 2007, up to $2 million debt discharge on debt that is secured by a principal residence will be exempt from income tax. In turn, taxpayers will have to reduce the "cost basis" of the property.

Now the PFBlog question is: can this new law introduce perverse behavior? Say, a bank invents a new mortgage product that charges higher-than-market interest rate, but promises to forgive certain amount of debt based on good payment behavior? This way, homeowners can get deduction on a larger amount of mortgage interest payment than they will otherwise have, but will pay off the debt at the same speed after they qualify for debt-forgiveness-with-good behavior?

Gladly, this time our Congress is smarter (compared to 1970) to close the loophole beforehand. The Mortgage Forgiveness Debt Relief Act of 2007 reads:

"EXCEPTION FOR CERTAIN DISCHARGES NOT RELATED TO TAXPAYER'S FINANCIAL CONDITION- Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer."

At least they got it right once!

More PFBlog Articles You Might Find Interesting ...


This Post Has Received 2 Comments. Share Your Opinions Too.


Elvis Manning Commented on December 25, 2007

Can this change in law introduce perverse behavior? If money is involved, you can rest assured that perverse behavior is not far behind. Since the world of finance is all about making the "almighty dollar", every regulation will be exploited to that end. This is simply a fact in the balancing act of life.


drchunger Commented on December 25, 2007

world of finance? oh come on, if you think that this happens only in financial services firms, you're mistaken. it is the basis of capitalism.



Read More ... 88 Posts In The Same Category










This page was last rebuilt at January 27, 2014 07:33 AM PST.
 

RSS FEED





PERSONAL FINANCE BLOGS I READ

Consumerism Commentary
Get Rich Slowly
My Money Blog
All Financial Matters
The Simple Dollar






.



Copyright 2003-2014, PFBlog.com. All Rights Reserved. (Privacy Policy)