The 2012 presidential election is now behind us, but now more than ever before the question of reducing America’s debt is top of mind for people on both sides of the political aisle. The fiscal cliff being talked about in the news refers to the scenario that if enacted legislation remains unchanged, tax increases and spending cuts will result, thereby reducing the overall budget deficit.
Several significant tax deductions that pertain to homeowners are up for discussion as Congress struggles to reduce the deficit, according to the Seattle Times:
- Deductions for local and state property taxes;
- Federal tax exemption for interest on state government bond issues used to help provide mortgages for moderate-income home buyers;
- Capital gains exclusion of $250,000 – $500,000 on the sales of homes that were primary residences for a minimum of two out of five years;
- The Mortgage Forgiveness Debt Relief Act of 2007.
The Mortgage Forgiveness Debt Relief Act gives distressed homeowners a reprieve on paying income taxes for mortgage amounts forgiven by lenders in loan modifications or short sales. If the Act is left to expire on December 31, 2012, borrowers could be responsible for taxes on the difference between the mortgage owing and the sale amount of the property, come January 2013.
Current tax write-offs help homeowners whose itemized deductions exceed the standard levels. While most Americans don’t buy homes for the sake of deductions, they can be lured by them, notes Fox Business. Experts caution that the deductions themselves should never drive a home purchase. “It has to be the right fit for your lifestyle and budget,” says Bob Walters, chief economist at Quicken Loans. Everyone agrees that the deficit must be reduced, but the way to get there remains cloudy.