Are Mortgage Settlement Payouts Taxable? Stay Tuned

Are Mortgage Settlement Payouts Taxable? Stay TunedAs checks began rolling out this week to claimants under the National Mortgage Settlement, administrators added new information to the NMS official website.
It’s about the pending “tax status” of the payouts, which amount to $1,484 each, according to claimants who have reported their checks’ arrival since Wednesday on eCreditDaily and social media sites.
Many claimants are still waiting for their checks to arrive from Rust Consulting, the payment agent.
“We felt it was important to let people know that as of now it’s (tax liability) an open question, so payment recipients should plan accordingly,” said Geoff Greenwood, Communications Director for the Iowa Department of Justice, Office of the Attorney General. Iowa AG Tom Miller was the lead state negotiator in the National Mortgage Settlement.
State attorneys general are waiting on specific guidance from the Internal Revenue Service on the tax implications for nearly 1 million NMS check recipients.
“When it is available we will post it on this website and will provide you with further information regarding the tax consequences, if any, of your payment,” said the statement on the NMS website.
But the statement also cautions recipients on the likelihood of having to report the payment on their income tax forms early next year, potentially increasing their taxable income.
“If required by the IRS, we will send you the necessary forms and information,” the statement reads. “Because of the current uncertainty, you may wish to reserve a portion of your payment for possible payment of taxes based on your federal and state tax rates.”
The more than 600,000 additional recipients of mortgage-settlement assistance — in the form of mortgage modifications, short sales and mortgage principal forgiveness — are more fortunate. They are protected by the  Mortgage Debt Relief Act, which was extended by lawmakers in January through the end of this year. The law provides a tax break on forgiven mortgage debt via short sales or other foreclosure-prevention programs.
In the case of the separate foreclosure-abuse settlement, known as the Independent Foreclosure Review (IFR), payments — ranging from $600 to $125,00 — “may be subject to taxation depending on the borrower’s individual circumstances.”
The tax treatment for IFR payout recipients depends on the borrower’s individual circumstances, as is likely the case for NMS claimants.
Reporting requirements also depends on the category under which the IRS classifies the NMS payouts of nearly $1,500.
For example, if it is deemed a “base payment” that does not represent reimbursement, then the paying agent, Rust Consulting, will report the payments to the IRS and appropriate state agencies and to the borrowers on “Form 1099 MISC.” This usually applies to checks in an amount of $600 or more.

3 thoughts on “Are Mortgage Settlement Payouts Taxable? Stay Tuned

  • June 16, 2013 at 5:30 am

    They have got to be kidding….banks already got taxpayer money…let the banks pay the tax

  • June 16, 2013 at 5:32 am

    Is the IRS checking Wells Fargo for filing false documents? Most of these foreclosures were illegal so the information sent to IRS from them was fraud.

  • June 18, 2013 at 9:49 am

    You will only be taxed if you are a tea party member.

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