In early August, Bank of America agreed to a $16.65 billion settlement, which includes funds for “consumer relief.” However, after tax write-offs and deductions, Bank of America's net penalty could be less than $15 billion. And while the company enjoys these tax breaks and avoids criminal charges, American families could be hit with penalties for accepting the help the settlement is designed to provide.
While Bank of America enjoys tax breaks and avoids criminal charges, American families could be hit with penalties for accepting the help the settlement is designed to provide.
Roughly half of the settlement, about $7 billion, will be paid to communities and homeowners struggling with troubled mortgages. Some of these mortgages could be reduced to 75 percent of the value of the home, and the interest rate would be permanently reduced to two percent.
Shockingly, however, some of these households could be penalized if they accept help from the consumer assistance fund. Any debt forgiveness will, in the absence of legislative action, be counted as income when a homeowner files his or her taxes. People already harmed by Bank of America’s faulty mortgages will be required to pay taxes on their share of the settlement.
This highlights an important contradiction: Current policy gives tax breaks to law-breaking banks while families are penalized for accepting the compensation they are owed as a result of the banks' harmful actions. Bad behavior is subsidized, and those harmed are left to foot the bill.
In an attempt to address this problem, settlement negotiators set up a $490 million tax relief fund for homeowners. However, it is likely too small to prevent all qualifying homeowners from being taxed on the assistance they receive.
“Now, [the tax relief fund] will help tens of thousands of consumers to offset, at least in part, any taxes that result from consumer relief they receive as a result of this settlement, but it's only a temporary fix; the fund isn't large enough to cover every potentially affected consumer,” explained Associate Attorney General Tony West. There are as many as 2 million borrowers either in foreclosure or close to it in the United States, according to the Urban Institute.
While the Bank of America settlement and similar agreements have the potential to help some affected families, banks should not be using fines for bad behavior to reduce their tax bill while everyday Americans continue to suffer with the aftereffects of the 2008 financial crisis. Making sure that banks pay their fair share and that relief money reduces the hardships of vulnerable homeowners is crucial to helping these families – and our economy – recover.
For Further Reading:
Report: Obamacare Limits Subsidies for Excessive CEO Pay, Saves $72 Million, The Fine Print blog, Aug. 27, 2014
Renters in Foreclosed Properties Could Be Left Out in the Cold, The Fine Print blog, Aug. 27, 2014
20 Tax Dodgers: $240 Million for CEOs, Big Loss for the American People, The Fine Print blog, Aug. 17, 2014
S&P: Reduce Inequality for a Better Economy, The Fine Print blog, Aug. 14, 2014
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