Thankfully, 2013 did not begin on the sour note it could
have: a deal was reached by Congress in the wee hours of January 1st
to prevent potential economic disaster and steered us away from the “fiscal
cliff” you’ve no doubt heard so much about in the past month. While we can
debate the pros and cons of this deal no doubt, most home owners, sellers, and
potential buyers have just one question: How does this impact me?
Depending on where you fall on the earning scale, the fiscal
cliff deal was either good or bad for you; all those making under $400,000
individually ($450,000 total household) will keep the tax rates they now enjoy.
If you make over this amount, your taxes are set to increase to the same rate
they were back in 2003 at 39.6%, up from the 35% they were previously. Capital
gains taxes will also go up from 15% to 20% for the same income bracket. While
this doesn’t directly affect the housing market, you can bet that people
feeling the financial pinch will be more reluctant to make big property
purchases.
However, the great thing about the fiscal cliff deal is that
two major housing related tax provisions were left untouched: The mortgage
interest deduction, and an extension on the tax relief for mortgage debt
forgiveness. These two provisions are key in keeping homeowners from going into
foreclosure and in their current homes. The deal also allows borrowers to
deduct the amount they pay for private mortgage insurance, another great
incentive when it comes to buying a new home.
Take a look at the details of the deal:
Homeowner Tax Items
• Extends
through the end of 2013 mortgage debt tax relief
o The legislation extends the tax
exclusion for cancelled or forgiven principal residence debt, enabling short
sales and reducing downward pressure on housing prices.
o Also
enables mitigation efforts via government and lenders
• Deduction
for mortgage insurance extended through the end of 2012
o The deduction remains phased-out
ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000,
with complete phase-out at $110,000
o Extending the deduction reduces the
cost of homeownership for those using PMI, FHA, or VA mortgage insurance,
particularly first-time buyers
• Extends
the section 25C energy-efficient tax credit for existing homes through end of
2013
o Tax
credit is a key tool for the remodeling community
o Extends
the credit at the $500 cap level, as was the case in 2011
• Reinstates
the Pease/PEP phase-outs for deductions
o For married taxpayers above
$300,000 ($250,000 single), the Pease limitation reduces total itemized
deductions by 3% for the dollar amount of AGI above the thresholds
o For example, a married couple at
$350,000 is $50,000 above the limit, and must reduce the Schedule A deduction
total by $50,000 times 3% or $1,500, increasing their tax by approximately
$300.
o No more than 20% of the phase-out
is attributable to the MID and the Pease rule will affect a very small number
of current MID beneficiaries
