Yesterday I paid my taxes. Paid as in, I owed the feds $3050. This was the first year I’ve ever owed money. It’s my fault, yet I’m not unhappy as it could have been much worse, $51,000 worse. Here’s the story including a little bit on my confusion and my thanks to congress and the president. (There’s a first!)
There were several significant financial events that occurred in my life in 2007. The first was my acceptance of a new job that involved a 20% reduction in my salary. The second, my decision to pretty much emptied my TIAA-CREF account in order to eliminate 3/4ths of my credit card debt. (Yes, it was high. No, I’ve not added to it at all in the past two years.) The third was the dumping of my Aurora, CO house in the form of a "deed in lieu of foreclosure" deal with my mortgage lender. It’s the disposition of that loan where my confusion sets in.
As a result of giving up the house I was "forgiven" approximately $167,000 of debt. As the law stands, forgiven debt is considered taxable income. It was explained to me this way: If someone loans me a million dollars and two weeks later the loaner decides that I only have to pay half of it it back, I’m left with $500,000 of income which is therefore taxable. This, I understand. I’ve just made a half a million dollars.
In my case I gave the house back to the bank, they stopped my payments. Please show me what money I’ve made. I’ve nothing to show for it. Why should I have to pay taxes on money I don’t have? The taxes on $167,000? $51,000! Nice. I couldn’t pay my mortgage, how in Hell am I going to pay the taxes on the mortgage I no longer have? (BTW: I bought the house in 1998 for $106,000 and the bank recently resold it for $92,000. Lovely housing market we have here.)
Well, congress (and the president I guess since he would have had to sign the legislation) to the rescue with the Mortgage Forgiveness Debt Relief Act of 2007. Basically, if you lost a house to foreclosure (mine counts) in 2007 and the forgiven debt was less than $2,000,000 (mine counts again) then you are officially forgiven the owed taxes. YIPPIE! I can’t tell you how good it felt to watch that red $54,000 in Turbo Tax shrink to $3050 once I figured out the right box to check in the forms.
At the state level, Colorado is giving me back $49 and Nebraska is giving me back a more than $1800. So, in the end I’m only out about $1200. Considering how bad it could have been, I can’t really complain.
