Tax benefit restoration getting complicated

Renewal of important expired federal tax benefits for homeowners took a major step forward last week, but the route to final congressional approval is beginning to look longer – and potentially bumpier – than previously expected.
Here’s why. The Senate Finance Committee overwhelmingly approved a package of tax code goodies that includes a two-year reauthorization of the Mortgage Forgiveness Debt Relief Act, plus similar extensions for deductions of mortgage insurance premiums and energy-saving improvements to homes.
Mortgage debt relief is crucial for thousands of underwater owners who receive cancellation of a portion of their principal balances from banks in connection with loan modifications, short sales and foreclosures. Without an extension retroactive to Jan. 1, 2014 – which the Finance Committee package includes – these owners would be hit with federal income taxes on the mortgage amounts canceled.
Now for the bumps: The full Senate must still pass the so-called “extenders” bill containing the housing provisions. That vote could happen relatively soon – this spring – or could be put on a back burner based in part on the level of urgency the Senate leadership detects from the House side.
And here’s the message Majority Leader Harry Reid, D-Nev., is certain to get from the House’s most influential tax legislator, Ways and Means Committee Chairman Dave Camp, R-Mich.: Cool it. We’re not rushing. Camp says he’s more interested in reforming the entire federal tax code for the long haul rather than reapproving tiny pieces of it year after year.
He wants to look at the 50-odd special-interest tax benefits in the extenders bill – one by one – to determine whether they merit a place in the code. Among the breaks he plans to evaluate apart from the housing-related ones: Should the federal tax code provide financial subsidies to owners of race horses? TV and film producers? Auto race tracks? Rum producers in the Caribbean?
He’s got a point. Are all the now-expired tax subsidies for niche groups and industries, which sometimes cost billions of dollars in lost revenue to the Treasury, cost-effective? Do they benefit the economy as a whole or are they simply sops to well-shod lobbies? If they can be justified on the merits, fine, we’ll keep them. If not, they should disappear.
To achieve this analysis, Camp plans to conduct months of hearings and markups – a challenge given Congress’ already tight pre-election schedule. At the end of the process, it’s likely there will be fewer special-interest tax benefits in the House’s bill than the Senate’s. Republicans may also insist that whatever short-term special-interest provisions are approved be offset by revenue-raising measures – cutbacks in tax benefits – elsewhere in the code. How well will homeowner benefits such as mortgage-debt forgiveness, mortgage-insurance premiums and energy-conservation deductions stand up to Camp’s planned rigorous evaluation?
It depends. On one level, mortgage-debt forgiveness tax relief looks like a solid bet to make it into any final package. Since its enactment in 2007, it has helped thousands of owners who, often through no fault of their own, faced staggering tax bills on what amounts to phantom income – money the tax code says they “earned” simply because a mortgage lender decided to subtract it from the principal debt the owner owed on the loan.
To illustrate, say the value of your home dropped sharply, not because you failed to keep it in good repair but because the economy went into deep recession. Your employer cut back on your work hours and you found it increasingly difficult to make full, on-time payments on your mortgage. To help you past these problems, your lender agreed to reduce the amount you owed as part of a loan modification. It canceled $80,000 of your debt. Without the protection of the 2007 mortgage-forgiveness-relief provisions, the IRS could demand more than $22,000 in income taxes on the $80,000 your lender wrote off – “income” you never pocketed and probably don’t have on hand.
Mortgage-forgiveness debt relief has strong bipartisan support in the Senate and some support in the House. But if Camp and the Republican majority demand “pay fors” elsewhere in the code as the price of retaining it – the estimated revenue “cost” of this provision alone is $5.4 billion over 10 years – negotiations could get complicated.
Ditto for mortgage-insurance-premium deductions and home-energy conservation. The political odds in an election year still favor their survival, but it’s likely to get messy along the way.


Ken Harney is a member of The Washington Post Writers Group. He can be reached at kenharney@earthlink.net.

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