New Tax Break Help Rich Become Richer

Last Revised on January 23, 2008

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Congress has cut down the tax penalties homeowners experience with foreclosure, but critics say this debt relief help rich wealthy Americans the most. The Mortgage Forgiveness Debt Relief Act of 2007 was signed by President Bush just before the Christmas last year, mostly to help average American people. But as it turns out, debt relief in a mortgage renegotiation or foreclosure won’t be counted as taxable income. And, the law makes as much as $2 million in debt relief tax-free. That’s way beyond anybody would want it to be. Under this new law, debt forgiveness on your primary residence, up to the $2 million ceiling, escapes taxation for 2007, 2008 and 2009.

Under this new tax break regulation, if someone owns a $2 million mortgage, he or she will be in the 35% bracket, which results in a $700,000 reduction in your taxes paid for by common American people. Another downside of this law is that it will most likely encourage more people to take loans they can’t afford. That’s not what the law was supposed to do.

Surviving spouses get a real-estate break with this new tax cut rules too. If a surviving spouse sells a personal residence within two years of being widowed, the survivor qualifies for a $500,000-gain tax exclusion. Normally, a single taxpayer would be limited to a gain exclusion of $250,000.

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