More Regressive Tax Hikes Could Hurt NC Homeowners

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In the same bill that hikes the gas tax to the tune of $1.2 billion over 5 years, the NC Senate has included a few other regressive tax hikes that will disproportionately impact working families in NC. The bill forces homeowners to pay state income taxes on mortgage debt that has been forgiven by lenders, which could cost some thousands of dollars in state taxes. 

From the Charlotte Observer article,

North Carolina lawmakers are poised to renew a rule requiring homeowners to pay state income taxes on mortgage debt forgiven by lenders – a move that could cost some homeowners thousands of dollars in additional taxes.

For years, North Carolina allowed taxpayers not to count written-off mortgage debt as taxable income after Congress, responding to the mortgage crisis, enacted a similar exclusion on federal income taxes.

In 2013, North Carolina took away the exclusion for the first time since the crisis. And last week the N.C. Senate passed a bill that would not allow the exclusion for tax year 2014. The House is expected to vote on the measure this week.

To illustrate what the bill would mean, if a homeowner received $20,000 in mortgage principal forgiveness, he or she would have to pay $1,160 in additional taxes, based on the state’s individual income tax rate of 5.8 percent. If $40,000 were forgiven, he or she would owe $2,320 in additional taxes.

Analysts say the proposal, which is included in a bill changing the state’s gasoline tax, could affect as many as 4,000 N.C. homeowners caught up in the mortgage crisis.

Republican and Democratic lawmakers are divided on the proposal, which General Assembly staffers estimate will bring in about $14 million in 2014 tax revenue.

Republicans say the move would be consistent with other tax changes that have lowered rates and eliminated many deductions.

But Democrats and some consumer advocates say it would hurt homeowners struggling to recover after falling into foreclosure and defeat the purpose of a lender providing the debt relief in the first place.

“This is not a good policy,” said Al Ripley, director of consumer and housing affairs for the North Carolina Justice Center. “We want to try to create situations where they will be able to afford to stay in their house ... not engage in policies that will take resources away from those families and make it more likely that they will end up in foreclosure or face other economic hardship.”

Taxpayers can still claim the exclusion on 2014 federal income taxes after President Barack Obama signed an extension in December. The exclusion stems from the Mortgage Debt Relief Act of 2007.

As recently as two years ago, North Carolina was one of seven states not allowing taxpayers to exclude canceled mortgage debt from taxable income, according to a study by H&R Block.

The N.C. Department of Revenue said it is still compiling data for tax year 2013 and does not know how much additional tax revenue the state collected on canceled mortgage debt that year. 

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