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.

By Teresa at MSN Real Estate Dec 7, 2012 1:10PM

House made of a hundred dollar bill (© Metta image/Alamy)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?

Tags: loans
 
326Comments
Dec 24, 2012 9:05PM
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THE DEDUCTION IS UNFAIR USED BY SOMEONE WHO CAN AFFORD TO PURCHASE A HOUSE AND HAS ENOUGH IN DEDUCTIONS.
IT REALLY IS FOR FOLKS WITH A HIGHER INCOME.
GET RID OF IT.
GO BACK TO AN OLD IDEA OF TAXING BY A PERCENTAGE ACROSS THE BOARD. NO DEDUCTIONS AT ALL.  
Dec 23, 2012 2:00PM
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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. 

Dec 23, 2012 11:25AM
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One more thing... For those people, whether you are rich or otherwise, who think they don't pay enough in taxes and should pay more. You are free to write a check to the Treasury at any time.
Dec 23, 2012 9:10AM
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It seems there are a lot of people who need to educate themselves on what the mortgage interest tax deduction really is before they make any comment.
Dec 23, 2012 4:02AM
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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!

Dec 22, 2012 11:29PM
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Why is it that the hard working middle class tax paying citizen must fall to all the government 's needs and not none of them? No matter how much we or I work to make our life just a little bit easier the government comes in and tries to take it all away. We need any and all tax breaks, deductions, and benefits we can get just to live a normal life that every american has always wanted. All those elected officials have always wanted to use the middle class group to support their lives and life styles, "Oh let's get the middle class to give up their dreams and hopes up" We need our million dollar homes, off shore accounts, the life style that they and their families are living now. I have a family I was told long ago that I can have the American dream, the job, home, car kids a good education, as long as I did the right things. Make sure the bills are paid, family is taken care of, just doing the right thing. But NO!!!!!! it seems when the people do the right thing and things are going well, things are looking up,life seems just right where it's suppose to be "BAM" our world starts falling in around us. Know what it's no fault of our own it's the "Governments', they can't bare to see any one having something they worked so hard to have and enjoying life, they start with the changes. New taxes,on the middle cl****grams taken away, every benefit that was a homeowners, hard working middle class family dream gone!!." WHY? because the filthy rich, and even the "leaches" on capital hill want it all and then some. What ever happened to all the big companies with the CEO'S who stole everyone's pensions' and savings of so many? How many of them had all their positions taken away from them and put in regular homes, had those million dollar cars repoed, their kids taken out of those expensive schools and going to a public schools, their wives shopping at an "Aldis, or a Jewels, a Wal-mart"?   NONE!!!!!!! Why does the government want to "wipe out the middle class citizens'"   "Is it because we are the only group of people who actually work for a living, who knows what hard work is, getting your hands dirty, working 12-16 hours a day"? Supporting a family, paying the mortgage, car note, credit cards, and other debits. None of the above thoes politicans have ever done before because they have always had everything handed to them,or promised to they when they got to the top by "daddy". I am a single parent and have been for a very long time,. Raised four beautiful children, my first and only husband died in 1982 he had "ALS". It has been a long and bumpy road, but by the grace of God Almighty I am here and I would like to remain here in my "dream home" that I thought was impossible and with no "government take-aways, or discontined benefits, or tax hikes on the middle-class citizen"" With this being said this all might work, Thank you one and all C. Ochoa
Dec 22, 2012 10:53PM
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If you live within your means, the mortgage deduction is worthless.  I can't even itemize because I don't have a McMansion and qualify for little else.  If I ever did, it would be very little, as the article states.

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...

Dec 22, 2012 10:40PM
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Usually in a game of Monopoly. each player gets a limited amount of money and as the better / luckier players buy up the board and charges you rent for landing in their space, you lose money while you hope they land on your ownings and hopefully you gain theirs.  This goes on until one player finally gets all the other players' money and the game ends.  In real life, we don't get to end the game and start over. The winners in the real life game of Monopoly keeps getting wealthier and wealthier while the others work on trying to survive as they are slowly eaten alive by inflation while their employers (usually of the wealth class) keep cutting their benefits and making the workers pay more and more for what used to be included with their jobs.
Dec 22, 2012 10:37PM
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I understand your pain, here in the same boat. It is hard to get up every morning at 5:30 AM to go to work while others in welfare stays their warm bed and ride a BMW because I pay for their living and all their needs.  We do not need deduction  cuts we need a rise in the percentage of the deductions including the property taxes and the homeowner insurance over payments we have to afford every year, my property taxes went from $1,900 to $3,400 and my property value went down almost 45%, the homeowner insurance went from $1,579 a year to $4,900 and never ever had a claim since I own the property (20 years). How can we survive? How much more the government plans to squeeze us? We the middle class are the ones that pays for the welfare and who pays for us?  We never qualify for any governmental aid, our kids do not qualify for financial aid for college, only for student loans with high interest, we struggled to make car payments, I wish I could have a lobster tail or two in my grocery cart at least once a year, but guess what? welfare people can afford them more than once a year.  Why the government can't provide me with a free medical plan? Why I can't have the same insurance plan that our Senators, Rep. and president have? The Obama Care will not going to provide us with any benefit, but you and me are going to pay for it on top of our regular medical insurance, so welfare people can benefit from it. We the middle class are the ham of the sandwich and I think we as citizens have to stop this, I am not a communist or a socialist but I am getting sick and tired to be abused.
Dec 22, 2012 10:26PM
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Teresa Mears qualifications to give advice are questionable.  He math is beyond questionable, it's just plain wrong.  Let's pretend my 2 income household makes 250K annually combined which was the maximum in Teresa one tier.  The current amount of interest on a 335K loan with a balance of 298K(end of year 5) at 3.75% is @ 11,000.  25% of that is $2750.  At 375K, the tax savings to the borrower is $3437.  If you are on the left coast or the east coast or Chicago, Denver, Dallas, Houston, etc, the tax saving is substantial.  A two person household income of 120K with 7k in interest is saving $1750 in income tax.  If you're making 50K and it doesn't benefit you, take the standard deduction, but don't use that as an excuse to take away the deduction from the rest of us. 
Dec 22, 2012 10:26PM
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Let's see.  You pay rent for thirty years and you have nothing to show for it.  You buy a house and hopefully you pay off the mortgage in thirty years and you get to live in it for only the cost of maintenance, taxes and utilities.  If you're lucky your house will be worth at least what you paid for at the end of the last mortgage payment.  For the majority of people (middle class) their home is usually their largest asset by the time they retire. For many middle class buyers, the mortgage deduction is a large reason they can even afford the house payments.
Dec 22, 2012 10:07PM
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'Yes' we need the house deduction. That is the only deduction I have, besides charity.  I never have enough medical and don't have children to use as a deduction. And quite frankly if the NFL is listed as a non profit organization and therefore does not pay taxes, then I should be able to keep my home deduction. If the oil companies get 10 billion in subsidies then I should keep my deduction. GE electric hasn't paid taxes in years then I should be able to keep my measly 2000 deduction. So stop all this talk of taking away this deduction. The removal of this deduction will kill the housing industry because there will no incentive to be a home owner. People really need to think of the repercussions of such actions.
Dec 22, 2012 9:52PM
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If they do away with the mortgage interest deduction then I will give my house back to B of A.  It will either be a foreclosure or a short sale. 
Dec 22, 2012 9:44PM
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If the government does away with the mortgage interest deduction, home sales would fall off, people would not have the extra money they could spend in stores, cause more economic woes. The Govenment is made up of nothing but greedy lawyers. Now think about how a lawyer makes money. Ever hear the phrase, "No fees if we can not win the case." Of course if they win, it's a different story. Now we got a Nation's Capital full of lawyers and they want to take more away from homeowners. Why, money out of their pockets? Don't think so. Just think of it like this. The government taxes all he elgible tax payers only five cents and they make billions of dollars and still won't pay down the nationl debt. KEEP the mortgage interests deduction alive. Fight, fight, fight!
Dec 22, 2012 9:36PM
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Most tax deductions are to stimulate growth or demand in an area. Buying a home and paying for it is one of the biggest ways to create jobs and maintain our society. Make for less crime and personal accountability. I think this is the first article I've ever seen that questioned the support of home ownership.
Dec 22, 2012 9:15PM
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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!

 

Dec 22, 2012 9:14PM
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we need to reform social services, Anyone one appling for aid has to pass drug test ,Also limit what can be bought on food stamps. junk food,  sodas, energy drinks should not be alloweed.
Dec 22, 2012 8:59PM
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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.

Dec 22, 2012 8:53PM
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I am a homeowner, and I benefit from the tax deduction.  Truth be told, I was able to afford my house because I counted on the tax deduction.   That's not unusual.  But, it is a problem.  Most middle class only are able to itemize because of the mortgage interest deduction.  Without the deduction, most would simply get the standard deduction.  I fundamentally agree, that there should be no mortgage deduction.   I don't believe it stimulates home ownership.   It appears to, but what it actually does is artificially inflates housing prices.    I've read comments that cutting the deduction would bankrupt already fragile municipalities.  I disagree.  They'll just increase taxes if home prices self correct because of the lack of deduction.  There are cynics that will disagree with me, but I do not believe that our government, (as worthless as they are lately) would ever get a bill passed to cut off current mortgage holders from getting the deduction.  If this idea were to move forward, and it is a BIG if, because it is so controversial, the only way it would work, is if current mortgage holders were grandfathered in.  If you sell your house, and get a new mortgage, you'd lose the deduction.  If you stayed in your current mortgage, you'd get it as long as you benefited from itemizing your taxes.  
I don't believe that this deduction benefits the middle class the most.  The rich benefit the most from this and most tax incentives.  I believe we need to end these incentives that decrease federal revenue.  By and large the biggest ones who benefit are the rich.  The fact that  some middle class benefit, is totally by design so it looks appealing and gains popularity to get it passed.  Middle class are the suckers being duped by the rich who really benefit.  
Dec 22, 2012 8:45PM
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Social security should be eliminated.  Then the funds that are contributed by the employee and the employer, which prior to the tax reduction initiated that reduced the amouts were a total of 13% of your income, would then be put into an interest earning account for each individual.  Can you imagine how much money you would have to retire on if 13% of your income was going in to a 401K account specifically for you for 30 plus working years, instead of the way that Social Security is administered.  The real rip off is that you and your employer are forced to contibute to this fund which is for all practical purposes a "slush fund" for the federal government.

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