Just before Christmas, President Barack Obama signed into law H.B. 5771, known as the Tax Increase Prevention Act of 2014, which retroactively extended 55 tax provisions – including one that provides distressed homeowners relief on forgiven mortgage debt.
The bill was introduced by U.S. Representative Dave Camp (R-Michigan), Chairman of the House Committee on Ways and Means, on December 1, 2014. Two days later, on December 3, the bill passed in the House by a vote of 378 to 46. On December 16, the Senate passed the bill by a 76 to 16 vote. The president signed the bill into law on December 19.
The tax provisions covered by the bill, which expired on December 31, 2013, are retroactively extended for one year until December 30, 2014, and will be effective on income tax returns filed for the year 2014. One of those provisions, covered under Section 102 of the bill, allows homeowners to exclude forgiven mortgage debt (the remaining mortgage loan balance when a home is sold in a "short sale" to avoid foreclosure) from their gross income when filing tax returns.
This provision is an extension of the Mortgage Forgiveness Debt Relief Act of 2007, originally signed into law by President George W. Bush, which relieved distressed homeowners from having to pay taxes on forgiven mortgage debt for the three calendar years of 2007 through 2009. That tax exemption was extended three more years until the end of 2012 with the Emergency Economic Stabilization Act of 2008, and it was extended until the end of 2013 with the American Taxpayer Relief Act of 2012.
Section 104 of the new bill allows taxpayers who own homes to count qualified mortgage insurance premiums as interest for the purpose of mortgage interest deduction on their tax returns.
"USMI commends passage by Congress last night of a one year extension of vital homeowner tax relief," U.S. Mortgage Insurers said in a prepared statement. "We are especially pleased that the legislation includes the tax-deductible treatment of mortgage insurance premiums for low and moderate income borrowers. We look forward to working with Congress towards permanent enactment of this important tax relief for homeowners."
Many of the lawmakers who voted to pass the bill agreed that while extending the tax breaks another year is a step in the right direction, a more permanent solution is needed.
"I will support this bipartisan compromise but I would have preferred a two year tax extenders agreement that gave working families and Wisconsin businesses more long-term certainty," said Senator Tammy Baldwin (D-Wisconsin), one of the 76 senators who voted in favor of the bill. "Wisconsin families and businesses don’t plan on one year increments and we need long-term solutions, not short-term Band-Aids."
Senator John Boozman (R-Arkansas), who voted in favor of the bill, said he believes the nation's tax code needs reform in order to make things fairer and simpler for every American.
"However, in the interim, extending these tax provisions is just plain commonsense," Boozman said. "By doing so, we prevent tax increases on hardworking Arkansans, as well as small businesses and farmers who are our state’s economic engine."