It’s a classic Christmas tree bill, loaded with year-end giveaways for dozens of special-interest groups and easy to mock. The $620 billion “extenders” legislative package passed by the House and Senate before the holiday recess hands out generous tax presents to all sorts of niche pleaders, from race horse owners, rum makers in Puerto Rico, TV and film producers and a wide assortment of others.
But don’t forget: Homeowners and mortgage borrowers also count as special interests on Capitol Hill, and this year’s Christmas tree is sprinkled with tax benefits for them as well. Some could even lower your next tax bill.
Take home improvements you made during the past year that conserve energy, such as putting in new insulation, more efficient windows or an exterior door. You may be eligible for a 10 percent tax credit on their cost up to a maximum credit of $500. Tax credits come directly off your bottom line federal tax bill, so a $500 credit is more valuable than a $500 deduction, which is tied to your marginal tax bracket. The energy-efficiency credits expired at the end of 2014, but the new bill retroactively authorizes them for all of 2015 and through 2016. Industry estimates predict that homeowners will save nearly $700 million in taxes this year and next thanks to the extension.
The federal budget bill that Congress passed along with the extenders legislation also reauthorized the biggest home energy-efficiency tax subsidy of all – the 30 percent credit for installing “renewable energy” improvements such as solar panels, wind and geothermal equipment. There is no dollar limit on what you can claim as a credit on these improvements, but the equipment must be purchased by you outright and installed on your principal residence. If you don’t own the solar panels on your roof, you don’t qualify for the credit.
Another key extension in the tax bill: Deductions for mortgage insurance premium payments. Millions of home purchasers who make down payments of less than 20 percent currently are charged mortgage insurance premiums or guaranty fees, whether for conventional loans (those eligible for sale to Fannie Mae or Freddie Mac) or government-backed Federal Housing Administration (FHA), Veterans Administration (VA) or Rural Housing loans backed by the Agriculture Department. Until a few years ago, these premiums were not deductible, but the new tax bill will allow you to write off the premium payments made this past year and through 2016. This is of special importance for moderate income buyers. If your adjusted gross income is $100,000 or less ($50,000 or less if married filing singly), you can write off all your mortgage insurance premium payments. Above $100,000 (or $50,000), the amounts you can deduct phase down and zero out when your income exceeds $109,000 ($54,900).
For some homeowners, the most important provisions in the extenders bill have nothing to do with credits or deductions. For them, the reauthorization of the mortgage debt forgiveness exception could save thousands of dollars of potential tax liability, this year and next. Under the federal tax code, when a lender forgives or cancels a debt obligation you owe, the IRS treats the amount forgiven as ordinary income to you, taxable at your regular marginal rate. In 2007, Congress created a special exception to this rule for owners who had mortgage debt canceled as part of a short sale arrangement with their bank, a foreclosure or a loan modification. Since then the exception has been reauthorized several times and has been used by an estimated 800,000 financially distressed owners. But it expired last Dec. 31. That lapse left potentially thousands of owners who received debt cancellations during 2015 twisting in the wind, uncertain about whether their transaction might result in huge tax bills they could not afford. For example, an owner who participated in a short sale and had $100,000 of mortgage debt forgiven, might owe the IRS $28,000 or more.
The new extenders bill removed that uncertainty. On qualified mortgage debt cancellations completed during 2015 and 2016, short sellers and others now can be assured that they won’t be hit with massive tax bills. How big a deal is this? If you were or are underwater on your home mortgage and a short sale – with some amount of debt forgiveness by your lender – is the only way out, it’s a very big deal.