ST. PETERSBURG , Fla. — When the year ended, retired air traffic controller Brad Bates and his wife had been resigned to their fate: a tax-bill jump of about $25,000 due to the potential sale of their underwater home.
A crucial tax break for forgiven mortgage debt had expired Dec. 31, meaning they would owe taxes on the money they didn’t pay toward their loan, likely pushing the couple into bankruptcy.
But tucked in the New Year’s Day deal that dodged the fiscal cliff was a late Christmas present: an extension for the break until the end of 2013.
If the Bates’ home, which is now under contract, sells before year’s end, the couple will owe nothing extra to Uncle Sam.
“That’s terrific,” Bates said. “Maybe 2013 is going to be a much better year.”
Homeowners facing short sales, reduced loan principals or foreclosures can breathe easier after the 2007 tax break was extended late Tuesday in a bipartisan vote.
The extension will allow homeowners this year to avoid paying taxes on any money scrubbed from their debt to the bank.
Without the fiscal cliff deal, the relieved debt would have been taxed as income.
The one-year extension will save American taxpayers $1.3 billion, according to the Joint Committee on Taxation.