Do we really need the mortgage tax deduction?
Congress is weighing ending or curtailing the popular tax break. Housing-industry groups strongly oppose any cuts, though only 25% of Americans get any tax benefit.
One of the issues that has bubbled to the forefront in the fiscal-cliff discussion is whether the federal government should do away with the tax deduction for mortgage interest.
The deduction, in effect since tax code was written in 1913, is one of those things that, if you like it, is a cherished benefit that aids homeownership, and if you don’t, is a tax loophole that costs the country money it can’t afford.
It is projected to cost the U.S. Treasury $100 billion next year. It has been variously proposed that the deduction be eliminated, that this deduction (or all deductions) be available only to those earning less than $250,000 a year for couples or $200,000 for individuals, or that the deduction be replaced with a tax credit. There is no leading proposal, though it is worth noting that we’ve been writing for at least three years that this cherished deduction is in jeopardy and yet it is still here.
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While the deduction is popular, only about 25% of U.S. taxpayers actually receive it. The percentage ranges from 15% in West Virginia to 36.79% in Maryland, according to the Tax Foundation.
To deduct your mortgage interest from your taxable income, you first have to own a home. Then, you have to itemize deductions. You also have to have a mortgage. That means that renters, lower-income taxpayers and those whose home is paid for don’t get the deduction.
The mortgage interest deduction is available to any homeowner with a mortgage, but it provides more tax savings for the wealthy – not surprisingly, since they are likely to have larger mortgages. The Wharton School of Business crunched some numbers, CNBC’s Diana Olick reported.
The deduction saves taxpayers who make less than $40,000 a year about $100 each. Since only one-quarter of those itemize, most don’t save anything. Taxpayers who make up to $250,000 a year save $1,200 to $2,600 a year in taxes. Taxpayers who earn more than $250,000 a year enjoy an average tax savings of $5,400 a year, Olick reported.
In a report, the National Association of Home Builders quoted statistics from the Joint Committee on Taxation that found that the majority of those who benefited from the deduction earned $50,000 to $200,000 a year – though nearly one-third of the total amount saved went to those with incomes over $200,000. Those statistics were from 2008 and used an unusual method of computing income.
Eliminating or curtailing the deduction is strongly opposed by the housing industry. The chief economist of the National Association of Realtors has said that ending the deduction could lower housing prices by 15%. Other sources, including the Reason Foundation, have said the decline in value would be closer to 3%.
Both the NAR and the builders’ group have "calls to action" on their websites, urging people to tell their senators and representatives to oppose any repeal of the mortgage interest deduction.
But, looking over the fiscal cliff, is the mortgage-interest deduction something that should be sacred or is it time to talk about ending or curtailing the benefit?
The only tax deduction I have is my mortgage, I already pay 25% in taxes. If they take away the mortgage deduction, I will let my house go back to the bank as I won't be able to afford it. This will not only affect home owners but renters as well. The homeowners will just pass the extra expense on to their renters. I try to do the right thing, have a decent job that I've worked hard for, I'm under water in my small 800 square foot house, but I made an educated decision when I bought it and was not taken advantage of by predatory lenders. Maybe I should stay single, pop out a few kids I can't afford and get a minimum wage job and take advantage of the system, because it obviously doesn't pay to do things the right way.
Goto This is a proposal to eliminate all payroll taxes and were the American people can bring home there full pay check and only pay taxes when they choose at the point of sale.
No more filing, no more class warfare, Problem solved!
I think the biggest appeal of the mortgage deduction is to bankers, realtors, and homebuilders, since they use that 'deduction' as a reason for the buyer to go for a bigger loan over a longer period. Somehow, they convince the buyer that paying income tax on that money would cost them more than paying that money to a banker, which is just stupid.
I think it's quite weird that 50 years ago we were raised in a small house with numerous siblings, and maybe a grandparent or two, yet today we are raising 1 or 2 kids (or none at all!) in million dollar homes. There's something wrong with this picture...
Where are the 5 Myths? Those are all Facts! Yes you have to own a house, you have to itemize, you have to have a mortgage. I can't find the other 2.
There are better deduction that we can do away with then that! Why don't you ask the American people what the Government should do away with, and lets see what that list looks like!
As our government searches for and looks at all of the tax incentives that are available to the private sector they should also be looking at tax subsidies provided HUGH corporations. Ethanol comes immediately to mind. I'm not talking about the corn growers or producers, I'm talking about BIG OIL (like they really need to be subsidized for anything). Why is it that whenever there's a governmentally produced crisis the first place they look is at the homeowner, average wage earner, struggling parent?
The Feds float these things for public consumption just to weigh reaction, it's called market analysis. If people don't say anything, rest assured it'll happen. Now back to the mortgage interest and tax deductions associated thereto: Where would the incentive to buy go? Okay, let's rent, but why would anyone want to own and deal with rental property without out incentives? This is a no brainer. You want to start somewhere? Let's start with our entire tax law mess. There are CPA's, Government
Employees, and Attornies that can't even wade through the mess our Government has made over the last 50 years. It would take Millions of Dollars to put together any kind of proposal and then any proposal that came to the table would be challenged forever.
I'm 72, fixed income, still have a mortgage,(was in the military for many years forced to buy and sell homes) and that's not an excuse, I never had access to that government/base housing because of assignments. So go ahead, stiff me one more time and everyone else out here trying to survive. Our legislators are among the worlds highest paid group of individuals in the world, ergo, they are collectively detached from main stream Americans. We want changes, let's start at the top and work our way down.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.