California Expected to Cancel Tax on Forgiven Mortgage Debts

California is finally working towards needed State income tax relief for Californians who have received mortgage forgiveness through selling their homes in a short-sale process. The Sacramento Bee published an article on April 6, 2010 outlining this process. It appears that this tax relief could be in place by the April 15th tax filing deadline.

To quote the Sacramento Bee article as provided by CAR:

Relief appears imminent for thousands of Sacramento homeowners hit with state tax bills for mortgage debts forgiven in 2009.

State lawmakers said Monday they plan to cancel the state tax obligations with a vote Thursday.

Shannon Murphy, spokeswoman for Assembly Speaker John Pérez, D-Los Angeles, said legislation will go before the Assembly Revenue and Tax Committee today and the Appropriations Committee on Wednesday, and will receive a full vote Thursday.

A similar Senate floor vote planned Thursday would send the bill immediately to Gov. Arnold Schwarzenegger, who has repeatedly stated his support. The new bill is similar to one he vetoed March 25. But this time it omits a part he opposed – financial penalties for businesses that routinely seek state tax refunds. Democrats removed the section despite their contention that some firms “fish” for refunds whether or not they’re owed.

Monday, Schwarzenegger spokesman Mike Naple said the governor “hopes the Legislature fully addresses the concerns raised in previous versions of this bill.”

The new movement means that Californians who got unexpected tax bills of $10,000 or more in recent weeks could soon be off the hook. Most are borrowers who received loan modifications last year or lost their houses in short sales, in which banks accept prices below what they’re owed. In both cases, lenders forgave some of the debts owed them, a process that exposes borrowers afterward to taxes.

“We want to get it done before the (April 15) tax deadline,” said Alicia Trost, spokeswoman for Sen. President Pro Tem Darrell Steinberg, D-Sacramento. “We don’t want to have people jump through hoops.”

Many across the state have anxiously waited for the state to resolve the issue before the tax filing deadline – or have filed extensions.

Typically the state and federal governments view forgiven home loan debt as additional income and tax it. But both have backed off amid the housing crash. The federal government has suspended taxes on forgiven mortgage debt from 2007 through 2012. California suspended it for the 2007 and 2008 tax years. But disagreements over the business tax refunds stalled a bill extending it to 2009.

The bill being considered this week, Senate Bill 401, would cancel state tax obligations for forgiven mortgage debt through the 2012 tax year. The Assembly planned Monday to rewrite SB 401 from a bill regarding tax shelters to one that aligns much of California’s tax law with that of the IRS. That includes canceling taxes on forgiven mortgage debt and on recipients of federal renewable energy grants.

“We haven’t done a tax- conforming bill for four years, so it’s important to get that done,” Trost said Monday.

This article was provided by CAR as written by Jim Wasserman of  The Sacramento Bee.

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How to Get the Homebuyer Tax Credit

You’ve decided to purchase a home and take advantage of the Extended Home Buyer Tax Credit. Here’s what you have to do to get your benefit:

  1. Close on your home purchase between November 7, 2009 and April 30, 2010, or have a binding written contract in place by April 30, 2010 with a closing date no later than June 30, 2010.
  2.  Decide whether to: 
  • apply the credit to your 2009 tax return, filed on or before April 15, 2010;
  •  file an amended 2009 return; or, 
  • apply the credit on your 2010 return, filed on or before April 15, 2011.

      3.   Attach documentation of purchase to your return.

When to Apply the Credit

Buyers purchasing in 2010 will have the option to:

  •  Claim the credit on their 2009 return, even if the purchase is completed after December 31, 2009;
  •  File an amended return for 2009 if their purchase is completed after April 15, 2010; or,
  •  Claim the credit on their 2010 tax returns.

Applying the Credit to Your 2009 Taxes

You will need to do three things to claim the credit on your 2009 tax return:

  1. Fill out Form 5405 to determine the amount of your available credit;
  2. Apply the credit when you file your 2009 tax return or file an amended return;
  3. Attach documentation of purchase to your return or amended return.

How do I obtain an IRS Form 5405?

Go to: http://www.irs.gov/pub/irs-pdf/f5405.pdf

How to Apply the Home Buyer Tax Credit to your 2009 Return

To claim the credit as part of your 2009 return, you will need: The standard Form 1040 and Form 5405 for the home buyer tax credit.

  1. First begin Form 1040.
  2. Be sure to take note of your adjusted gross income, which you enter on lines 37 of the form. Form 5405 actually requires you to note your modified adjusted gross income, but that affects few people, so most will just use their adjusted gross income.
  3. When you come to Line 69 you’ll be asked to enter your tax credit amount. To do that, you’ll need to first complete Form 5405. 
  4. Once you complete Form 5405, enter the amount on Line 69, then complete your return.
  5. Attach Form 5405 to your return.

Collecting Your Refund

Any refund for which you qualify will be sent to you.

Determining Your First-Time Buyer Credit Amount: Form 5405

Regardless of whether you’re applying the first-time home buyer tax credit on your 2009 return or your 2010 return, you’ll need to visit the IRS Web site and download  Form 5405:  http://www.irs.gov/pub/irs-pdf/f5405.pdf . This form has just six lines and takes only a minute to complete. 

  1. On the first line enter either $8,000 or 10 percent of the home purchase price, whichever is smaller. Since the national median home price is around $175,200 (March 2009), in most cases the $8,000 will be the smaller of the two. In order for 10 percent of the home price to be smaller, the home purchase price would have to be $79,999 or less. 
  2. On the second line enter your adjusted gross income. You will find your gross adjusted income on line 37 of Form 1040, which you submitted when you filed your 2008 return. The tax credit form actually requires you to note your modified adjusted gross income, but that affects few people, so most will just use their adjusted gross income.
  3. If your adjusted gross income is more than $75,000 (individual) or your income is more than $150,000 (joint) you’ll have to complete some additional calculations to determine the credit amount for which you qualify.
    Everyone else will simply enter the tax credit amount on Line 6.

The information in this Blog was condensed from a recent NAR article. Please do not consider this article as income tax counsel and please verify the above information with your CPA or other Tax Advisor.

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