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2010 Federal Tax Return Form

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2010 Federal Tax Return Form

2010 federal tax return form Publication 15-B - Additional Material Prev  Up  Next   Home   More Online Publications
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Principal Reduction Alternative Under the Home Affordable Modification Program

Background


To help distressed homeowners lower their monthly mortgage payments, the U.S. Departments of the Treasury and of Housing and Urban Development established the Home Affordable Modification ProgramSM (HAMPSM) for mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac.

Under HAMP, a participating loan servicer must consider a sequence of modification steps for each eligible homeowner’s mortgage loan until the loan’s monthly payment is reduced to 31 percent of the homeowner’s verified monthly gross (pre-tax) income. Sometimes, a change in the mortgage loan’s interest rate is sufficient to reach the 31–percent target. Sometimes additional modification steps of term extension or forbearance are necessary as well. See the Home Affordable Modification Program (HAMP) page on the MakingHomeAffordable.gov website.

(For mortgage loans that are owned or guaranteed by Fannie Mae or Freddie Mac, eligible homeowners may be offered modifications under related programs also called “HAMP.” Because these related programs do not contain the principal reduction provision that these FAQs address, these FAQs use the term “HAMP” to refer only to the program for mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac.)

Since the last quarter of 2010, if a mortgage loan is being considered for a HAMP modification and if the ratio of the amount owed to the value of the home is greater than 115 percent, then the servicer must consider whether a Principal Reduction AlternativeSM (PRA) principal reduction should be effected as one part of the HAMP modification. See the Principal Reduction Alternative (PRA) page on the MakingHomeAffordable.gov website. 

For HAMP modifications that include a PRA principal reduction, the unpaid principal balance of the modified loan is divided into an interest-bearing principal amount and a non-interest-bearing PRA Forbearance Amount. If the homeowner then achieves a payment history that is sufficiently timely over a three-year period, the entire PRA Forbearance Amount is eventually reduced to zero. 

In connection with every HAMP modification of a loan that is not owned or guaranteed by Fannie Mae or Freddie Mac, to encourage participation in HAMP, the government provides incentives to the investor (that is, the holder of the loan), to the homeowner, and to the servicer. If a HAMP modification of such a mortgage loan includes a PRA principal reduction, the government makes additional incentive payments over three years to the investor. (These additional incentives are called “PRA investor incentive payments.”) The size of the PRA investor incentive payments depends not only on the amount of principal reduced but also on the loan-to-value ratio and the loan’s payment history before the HAMP modification. The PRA investor incentive payments range from 6% to 21% of the principal amount reduced.

For information on tax issues related to the Principal Reduction Alternative, see the questions and answers below.
 


Questions and Answers on Tax Issues Related to the Principal Reduction Alternative


Q1: If the government makes a PRA investor incentive payment to the holder of the mortgage loan, how is that payment analyzed for federal income tax purposes?

A1: The PRA investor incentive payment to the holder is treated as a payment on the loan by the government on behalf of the homeowner. 

Q2: Does a homeowner have income as a result of the government's having paid some of the homeowner’s mortgage loan by making a PRA investor incentive payment to the holder of the loan?

A2: No. This payment by the government on behalf of the homeowner is excludible from the homeowner’s income under the general welfare exclusion. Excluding this amount from the homeowner’s gross income is consistent with the treatment of Pay-for-Performance Success Payments, which are addressed in Revenue Ruling 2009–19

Q3: In a HAMP modification that includes a PRA principal reduction, the holder of the loan reduces the PRA Forbearance Amount by more than the PRA investor incentive payments (which are treated as payments on the loan on behalf of the homeowner). What federal income tax consequences for the homeowner result from that additional reduction by the holder?

A3: To the extent that the reduction in the PRA Forbearance Amount is more than the PRA investor incentive payments, the reduction is from the discharge of indebtedness. The full amount of this discharge of indebtedness is reported to the IRS and the homeowner on Form 1099–C, Cancellation of Debt, regardless of whether the homeowner may exclude any, or all, of it from gross income. See Questions 4 and 5 below for discussion of some exclusions that may apply.

Q4: Does the exclusion for qualified principal residence indebtedness apply to amounts discharged under a PRA principal reduction?

A4: The exclusion for qualified principal residence indebtedness may apply to a discharge of indebtedness under a PRA principal reduction if the amount discharged meets the criteria for qualified principal residence indebtedness. Under current law, this exclusion does not apply to discharges that occur after Dec. 31, 2013. For further discussion of the qualified principal residence exclusion, see the questions and answers on the The Mortgage Forgiveness Debt Relief Act and Debt Cancellation page.
 

Q5: Does the insolvency exclusion apply to amounts discharged under a PRA principal reduction?

A5: The insolvency exclusion may apply to a discharge of indebtedness under a PRA principal reduction to the extent that the taxpayer is insolvent when the discharge occurs. For further discussion of the insolvency exclusion, see page 4 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

 

Page Last Reviewed or Updated: 06-Feb-2014

The 2010 Federal Tax Return Form

2010 federal tax return form 6. 2010 federal tax return form   Catch-Up Contributions Table of Contents The most that can be contributed to your 403(b) account is the lesser of your limit on annual additions or your limit on elective deferrals. 2010 federal tax return form If you will be age 50 or older by the end of the year, you may also be able to make additional catch-up contributions. 2010 federal tax return form These additional contributions cannot be made with after-tax employee contributions. 2010 federal tax return form You are eligible to make catch-up contributions if: You will have reached age 50 by the end of the year, and The maximum amount of elective deferrals that can be made to your 403(b) account have been made for the plan year. 2010 federal tax return form The maximum amount of catch-up contributions is the lesser of: $5,500 for 2013 and unchanged for 2014, or The excess of your compensation for the year, over the elective deferrals that are not catch-up contributions. 2010 federal tax return form Figuring catch-up contributions. 2010 federal tax return form   When figuring allowable catch-up contributions, combine all catch-up contributions made by your employer on your behalf to the following plans. 2010 federal tax return form Qualified retirement plans. 2010 federal tax return form (To determine if your plan is a qualified plan, ask your plan administrator. 2010 federal tax return form ) 403(b) plans. 2010 federal tax return form Simplified employee pension (SEP) plans. 2010 federal tax return form SIMPLE plans. 2010 federal tax return form   The total amount of the catch-up contributions on your behalf to all plans maintained by your employer cannot be more than the annual limit. 2010 federal tax return form For 2013 the limit is $5,500, unchanged for 2014. 2010 federal tax return form    If you are eligible for both the 15-year rule increase in elective deferrals and the age 50 catch-up, allocate amounts first under the 15-year rule and next as an age 50 catch-up. 2010 federal tax return form    Catch-up contributions do not affect your MAC. 2010 federal tax return form Therefore, the maximum amount that you are allowed to have contributed to your 403(b) account is your MAC plus your allowable catch-up contribution. 2010 federal tax return form You can use Worksheet C in chapter 9 to figure your limit on catch-up contributions. 2010 federal tax return form Prev  Up  Next   Home   More Online Publications