DEAR MR. MYERS: I heard a brief report on the radio that said some of the tax breaks that expired in 2016 were suddenly extended into 2017, which would allow taxpayers to take them on the returns they are filling out now. Is this true? If so, are any of these extensions related to real estate?
ANSWER: Yes, it’s true that a handful of breaks that expired in 2016 were brought back to life earlier this month. The so-called tax extenders were part of the stopgap budget agreement that Congress and President Donald Trump reached a few weeks ago to temporarily reopen the federal government after a brief shutdown.
Two of those extensions affect millions of homeowners who are completing their 2017 tax returns now.
The first involves private mortgage insurance, commonly called “PMI.” It’s a special type of insurance that borrowers typically must buy if they make a down payment that’s less than 20 percent of the home’s purchase price. Should they default on the loan and the property be sold at a loss, the PMI insurer will reimburse the lender for some or all of its losses.
For years, the Internal Revenue Service allowed homeowners to deduct their PMI payments on their federal tax-returns. Though the write-off expired at the end of 2016, the extender approved by President Trump in early February will allow owners to claim it one last time when they fill out their 2017 federal returns this year.
The PMI deduction begins phasing out if your adjusted gross income topped $100,000 last year, and it cannot be claimed at all if you made $150,000 or more.
The second real estate-related extender involves short sales and foreclosures. Generally, when a lender agrees to reduce a seller’s debt, the amount that’s forgiven is considered “income” by the homeowner who borrowed the money, so it is taxable.
Congress amended that rule several years ago, allowing owners to keep up to $2 million of forgiven debt on a principal residence away from the clutches of the IRS. That exemption expired at the end of 2016, but – like the PMI deduction – was resurrected by the budget deal earlier this month.
Unfortunately, you won’t find the directions to claim either of these breaks in the printed tax publications, because the IRS went to press before the extenders were approved. The government hasn’t updated its irs.gov website, either.
Both the IRS and tax-software companies are scrambling to update their forms and directions. If you qualify for either of the breaks, you’ll have to delay filing your return until the new documents are officially revised.
If you have already filed but now qualify for one of the reborn tax breaks, you’ll need to file an amended return in order to claim it.
REAL ESTATE TRIVIA: The IRS reports that for the 2017 tax filing season, which covered 2016, the average refund was $2,782.
DEAR MR. MYERS: I came across a story you wrote a long time ago about a city in Montana that had been renamed “Joe” to honor the great football quarterback. But when I tried to look it up on the internet, nothing came up. Why not?
ANSWER: That’s because the little (pop. 26) town in southeast Montana has gone back to its original name: Ismay. It’s a hybrid of Isabella and May, two daughters of a local railroad superintendent in the 1800s.
Still, the story of “Ismay/Joe/Ismay” is a fun one to tell. Back in 1993, when quarterback Montana left San Francisco to join the Kansas City Chiefs, a Missouri radio station started flooding tiny communities in the Treasure State to get them to rename their town “Joe, Montana.” The folks in Ismay were happy to oblige.
It was a pretty good decision, considering that hundreds of sports fans started going out of their way each year to visit the remote area. Revenue from sales of pre-printed postcards and envelopes stamped “JOE, MONTANA” eventually helped the tiny town build a shiny new firehouse and a large community center.
DEAR MR. MYERS: Is a testamentary trust the same thing as the living trusts that you sometimes write about?
ANSWER: No. Unlike a basic living trust, a testamentary trust is contained in the trustmaker’s last will and testament. It’s sometimes used by people who have young children or disabled relatives who would have problems managing proceeds from the estate by themselves.
You also can choose an expiration date for a testamentary trust. Typical expiration dates include the day that a beneficiary turns 21 or 25 years old, graduates from college or gets married.
Testamentary trusts have their share of drawbacks. Perhaps the biggest is that, while a properly formed living trust can avoid the probate process completely, a testamentary trust doesn’t take effect until the will is officially vetted by a probate judge. That’s a potentially long and costly proposition.
David W. Myers’ column is distributed by Cowles Syndicate Inc.