The last-minute budget deal that lawmakers managed to piece together in the first days of 2013 to (partially) avoid the fiscal cliff did include an extension of the Mortgage Forgiveness Debt Relief Act. We’ve written about this law in the past, as it allows borrowers who have gone through foreclosure to avoid paying income tax on forgiven debt. Without the law, forgiven debt was treated as income and often substantially increases the tax bill for people with lower incomes and a large amount of forgiven debt.

As we discussed previously, the extension will help many struggling borrowers in Florida who are working to rebuild their finances after a foreclosure or a bankruptcy proceeding. Taxpayers who have average middle-class incomes could see their taxes increased to a much higher bracket if large debt discharges are considered income, and that could have a devastating effect on their finances.

For many Florida families, foreclosure is a last resort and it can be very difficult to lose the home. However, foreclosure is also an opportunity to start over and maintain a more sustainable balance between income and credit. The budget deal extends the Mortgage Forgiveness Debt Relief Act through 2013, which gives some added security to taxpayers who foreclosed in 2012 or who are anticipating a foreclosure this year. There are still some questions about whether tax relief will become permanent law, since some in Congress are pushing for a simplified tax code with fewer deductions. The Mortgage Forgiveness Debt Relief Act was originally enacted in response to a large number of foreclosures when the housing bubble burst.

Source: Sun Sentinel, “Mortgage debt relief law extended through 2013,” Paul Owers, Jan 2, 2013.

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