Congress Extends Tax Break for Troubled Homeowners, But Headaches Aren’t Over

What's Hot

23 Upgrades Under $50 to Make Your House Look AwesomeAround The House

Trump Worth $10 Billion Less Than If He’d Simply Invested in Index FundsBusiness

Do This or Your iPhone Bill May SkyrocketSave

11 Places in the World Where You Can Afford to Retire in StyleMore

19 Moves That Will Help You Retire Early and in StyleFamily

What You Need to Know for 2017 Obamacare EnrollmentFamily

8 Things Rich People Buy That Make Them Look DumbAround The House

50 Ways to Make a Fast $50 (or Lots More)Grow

32 of the Highest-Paid American SpeakersMake

The 35 Two-Year Colleges That Produce the Highest EarnersCollege

5 DIY Ways to Make Your Car Smell GreatCars

Amazon Prime No Longer Pledges Free 2-Day Shipping on All ItemsMore

More Caffeine Means Less Dementia for WomenFamily

7 Household Hacks That Save You CashAround The House

5 Reasons a Roth IRA Should Be Part of Your Retirement PlanGrow

30 Awesome Things to Do in RetirementCollege

Beware These 10 Retail Sales Tricks That Get You to Spend MoreMore

Forgiven debt that's considered taxable income can result in more debt for consumers. But Congress has extended a break that helps some former homeowners.

This post comes from Gerri Detweiler at partner site

Those who lost their home to foreclosure or sold it via a short sale in 2014 will hopefully breathe a little easier knowing that they may be able to avoid a huge tax bill when they file their tax returns.

With the passage of the “tax extenders” legislation Tuesday night by the U.S. Senate, Congress has given taxpayers one more year to exclude canceled debt from their income when filing their tax returns, as long as that forgiven debt arose from the loss or sale of their principal home.

This exclusion had expired at the end of 2013, and without the extension, some of these former homeowners could have faced massive tax bills for 2014, after suffering through financial difficulties that involved short sales or foreclosure.

For several years now, taxes on canceled debt has been a hot topic on the blog, drawing questions and concerns from consumers around the country. For example, one reader, Dana, is dealing with the potential loss of her home. “I am left holding the bag and am very SCARED!,” she wrote in response to a story about avoiding taxes on 1099-Cs. “What happens if I can’t pay the taxes or [insurance]. Also the thought of a 1099-C may leave me and my children on the streets.”

Taxes on ‘phantom’ income

Taxpayers are often required to pay taxes on canceled debt that is forgiven or goes unpaid for several years. When lenders cancel $600 or more in debt, they are required to file Form 1099-C with the IRS and provide the consumer with a copy of the form. The IRS then requires taxpayers to include that amount as taxable income when filling out tax returns, unless the taxpayer can demonstrate that they qualify for an exclusion or exception.

The IRS estimates that more than 5.7 million of those forms will be filed for tax year 2014, though it is unclear how many will be the result of canceled real estate debt versus credit cards or other types of consumer debt.

“Without the extension, hundreds of thousands of American families who did the right thing by short-selling their home would have to pay income tax on ‘phantom income,’” Chris Polychron, president of the National Association of Realtors, said in a written statement. “Realtors applaud Congress for passing the Mortgage Forgiveness Tax Relief Act, which will help the distressed homeowners who completed short sales in 2014.”

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 1,726 more deals!