More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
Though this may not apply to most clients of wealth managers, there may be, through “six degrees of separation,” some people within their sphere of influence that would benefit from IRS Tax Guidance, announced Wednesday, regarding distressed homeowners who have received help from various state and federal programs designed to avert “avoidable foreclosures.”
The IRS has issued tax guidance regarding “payments made to or on behalf of financially distressed homeowners under programs designed by state housing finance agencies (State HFAs).”
Much of this assistance is in the form of “forgivable loans” made to homeowners in distress who qualify for the various programs. They are “forgivable,” meaning that the “Treasury Department and the State Programs do not expect homeowners to make more than a minimal amount of payments on Forgivable Loans,” the guidance states, as long as the homeowner continues to make or assist in making payments on the original mortgage, and meets other criteria that vary with the different programs.
The programs include the Housing Finance Agency Innovative Fund for the Hardest-Hit Housing Markets (HFA Hardest Hit Fund), applicable in states in which home prices have declined 20% or more from the peak or unemployment is higher than the national average. The programs in Alabama, Arizona, California, the District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina and Tennessee are eligible.
This also includes other federal programs to help distressed homeowners in states not covered by the Hardest Hit Fund.
Income Tax Consequences
Although the IRS generally deems gross income to be “all income from whatever source derived,” the notice says, the IRS has “consistently held, however, that payments made under governmental programs for the promotion of the general welfare are not includible in an individual recipient’s gross income,” because of the “general welfare exclusion.”
Under Rev. Rul. 2009-19, 2009-28 I.R.B. 111, the IRS holds that “Pay-for-Performance Success Payments made under the Home Affordable Modification Program to help homeowners who are at risk of losing their homes pay their mortgage loans on their principal residences are excluded from income under the general welfare exclusion.”
The notice adds that “payments made under the State Programs with funds from the HFA Hardest Hit Fund and the payments made under the EHLP and the SSSPs with funds authorized by the Dodd-Frank Act promote the general welfare by helping homeowners,” and, therefore, are also excluded from gross income.
The notice adds a “safe harbor’ provision for 2010, 2011, and 2012: “this notice provides a safe harbor method pursuant to which a homeowner may deduct on his or her federal income tax return an amount equal to the sum of all payments the homeowner actually makes during that year to the mortgage servicer, HUD, or the State HFA on the home mortgage, but not in excess of the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) for years 2010 and 2011 only, and box 5 (real property taxes).
"This safe harbor method of computing the homeowner’s deduction applies for a taxable year if (1) the homeowner meets the requirements of §§ 163 and 164 to deduct all of the mortgage interest on the loan and all of the real property taxes on the principal residence; and (2) the homeowner participates in the EHLP, an SSSP, or a State Program described in the Appendix to this notice in which the program payments could be used to pay interest on the home mortgage.”
For the details and full list of programs, please see the IRS notice.