Tax Breaks Worth Considering
1. Cancellation-of-debt income: Normally, the tax benefit resulting from a debt cancellation, or forgiveness, is taxable. But the new law allows a tax-free exclusion of up to $2 million for mortgage forgiveness on a principal residence, with a few minor exceptions. Example: The exclusion is not available to individuals in Title 11 bankruptcy. The tax exclusion applies to discharges for the three-year period after 2006 and before 2010.
2. Mortgage insurance premiums: For the 2007 tax year only, taxpayers were allowed to deduct mortgage insurance premiums as qualified residence interest. At least a partial deduction was available for contracts issued after 2006 if the payor’s adjusted gross income (AGI) for the year did not exceed $109,000. (The threshold for the full deduction was an AGI of $100,000.) Now the new law extends this tax break for three years for premiums paid or accrued before 2011.
3. Home sale exclusion: Section 121 - Under the home sale exclusion, a single filer may realize a tax-free gain of up to $250,000 on the sale of a home owned and used as a principal residence for at least two out of the five years before the sale. The $250,000 exclusion is doubled to $500,000 for joint filers. Previously, the full $500,000 exclusion could be claimed by a surviving spouse only if the home was sold in the year a joint return was filed. For sales after 2007, the spouse may exclude tax up to $500,000 if the sale occurs within two years of death.
4. Co-op tax breaks: If certain requirements are met, the tenant-stockholders of a co-operative (informally referred to as a “co-op”) are entitled to claim allocable deductions for mortgage interest and property taxes. The new law liberalizes the test used to qualify as a co-op for this purpose. This change applies to tax years ending after December 20, 2007.
5. Emergency responders: Finally, the new law creates a new tax exclusion for members of qualified volunteer emergency response organizations, such as firefighters and medical personnel. For state or local tax benefits or qualified payments received for volunteer services, these individuals can exclude up to $360 annually from tax. The exclusion applies to amounts paid after 2007 and before 2011.
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