Tax deduction for paying down U.S. debt
Expanded use of D.C. ballpark tax

Is it time to kill the mortgage interest
tax deduction?

Wait a minute all you upset homeowners. Don't kill the messenger. Or at least focus on the original asker of the question.

That would be Howard Gleckman, who writing at the Tax Policy Center's TaxVox blog pondered whether this tax deduction is the best way to subsidize homeownership and even if we want to continue to use the tax code to prop up residential property purchases in the first place.

"To even ask seems almost un-American — almost like suggesting we replace barbeque at the Memorial Day picnic with, oh, tofu," writes Gleckman. "But a close look suggests there is much less to the hallowed deduction than meets the eye. Thus, we'd miss it much less than we think."

The deduction, which is projected will cost the U.S. Treasury $131 billion in fiscal year 2012, really isn't an efficient way to encourage homeownership, says Gleckman.

Mortgage interest deduction Schedule A excerpt

Most benefits go to high-income households that would probably buy a house with or without the deduction.

Plus, since taxpayers who don't itemize, regardless of whether they own their home or rent, can't claim the deduction, it's no surprise, says the Tax Policy Center senior research associate, that most of the tax subsidy goes to upper-bracket taxpayers.

The disparity across the country in who claims the mortgage interest deduction and just how much they claim also is the subject of a recent analysis by the Tax Foundation and the subject of a post at my other Bankrate Taxes Blog, What's your mortgage's tax value?

Not a new idea: The cost of and disproportionate tax benefits for a select groups of taxpayers means that elimination of the mortgage interest deduction regularly shows up on lists of ways to change our tax system.

In fact, Dubya's blue ribbon panel directed years ago to find ways to make our taxes more efficient and fair proposed replacing the mortgage interest deduction with a tax credit.

That suggestion was a key reason why the final report was shelved and never heard from again the day it arrived on the former president's desk.

We're still waiting on the latest tax overhaul suggestions from Obama's similar group of experts. Any bets on what this new group might say about the mortgage interest deduction?

Concern about housing: Would the homeownership level (and thus the housing industry and all its associated businesses) collapse if the United States did away with the home loan tax break?

Probably not.

We're the only country that offers such a tax incentive, and folks all across the world still own homes.

The difference in those countries is that their residents tend to live in more size appropriate residences that they can more comfortably afford.

But thanks to the mortgage interest deduction, U.S. home buyers have a tax incentive to acquire more expensive properties. And we usually do just that.

Credits instead: A new Tax Policy Center study, Reforming the Mortgage Interest Deduction, examines the the current mortgage interest deduction as well as a variety of proposals to modify the tax break.

The group offer four alternatives it says will produce the same budgetary cost as the interest deduction:

  • a 20 percent, nonrefundable interest credit   
  • a 17 percent, refundable interest credit  
  • a nonrefundable, 100 percent credit on the first $2,030 of mortgage interest and
  • a refundable, 100 percent credit on the first $1,490 of mortgage interest.

As you get set to read the full report, let me note a couple of definitions to keep in mind.

First, credits, which reduce tax bills dollar for dollar, are generally more beneficial than tax deductions, even one as popular as the home mortgage interest write-off.

And a refundable credit is one by which you can get money back from the IRS even if you don't owe the agency any tax.

All of the credits suggested by the Tax Policy Center would be available to home owning taxpayers regardless of whether they itemized their deductions or claimed the standard deduction.

One argument for replacing the mortgage interest deduction with a credit is that it would boost homeownership rates by making the incentive to buy a home more equal across income levels.

Folks with low marginal tax rates and who don't itemize, for example, might consider buying a home because they could benefit from a mortgage interest credit.

Some winners, some losers: Of course, whenever a tax law is created or changed, some folks benefit at the expense of others.

The tax code currently rewards most homeowners.

Replacing the mortgage interest deduction with a tax credit would raise taxes for some while reducing taxes for others.

Generally, the study found any of the credit options would provide more of a tax benefit to low- and middle-income groups, blacks and Hispanics, residents outside metropolitan areas, and, among metro residents, those living in the Midwest.

Congressional considerations: The key question for Congress should be would a change in the tax break be good and cost-effective tax policy.

Unfortunately, the reality is that the question likely to be asked on Capitol Hill is are the groups that would get more from a change in the home tax break large enough voting blocs to justify a vote?

Did you consider the size of the tax deduction when you bought your house? Would losing this tax break drop you from the homeowner rolls?

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The mortgage interest deductions only encourages people to buy larger houses, and stay in debt longer than they otherwise would. Many people decide to pay an extra $12,000 in mortgage interest to save $3,000 in income tax even though it is a net loss to them of $9,000.


Time certainly changes the number for some people. First year of mortgage, our interest was $35K, all deductible as the property tax and state tax exceeded the standard deduction. Now, it's running $12K/yr from both lower rates (5 vs 7+) and lower balance. The proposals above would cost us, obviously far less now than back when we bought it. Losing it then would have hurt, as it was all taken into account, the deduction wasn't an April windfall, but part of our (well calculated W4 adjusted) paycheck.
Can I close by saying now I don't care about this myself, but for those who were in our shoes with the brand new mortgage?

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