It appears that ending the mortgage interest tax deduction is being discussed in Washington as a way to reduce the budget deficit. The mortgage interest deduction allows homeowners to lower tax bills by deducting interest on home mortgages from their taxable income. Interest on up to $1 million in mortgages on first and second homes is deductible, along with interest on up to $100,000 in home equity debt. Bloomberg is reporting that the Joint Select Committee on Deficit Reduction has discussed the deduction but has yet to make a recommendation. What this could mean for taxpayers is up for debate with the National Association of Realtors saying the deduction is necessary to boost home ownership and lower the cost of ownership. However, there is research from the London School of Economics and the Brookings Institute that suggests the mortgage interest deduction does not increase home ownership and benefits wealthy Americans the most.
A proposed alternative to itemizing mortgage interest on Schedule A of Form 1040 is a credit for 15 percent of mortgage interest paid. Tax credits are available to all taxpayers even those who don’t itemize deductions on Schedule A. About 1 in 4 Americans currently report mortgage interest deductions on their taxes. In 2009 the Congressional Budget Office estimated that gradually replacing the mortgage deduction with a 15 percent credit could increase tax receipts for the government by $388 billion over a seven year period. In December 2010 a poll by Bloomberg showed that 51 percent of respondents opposed giving up tax deductions but that sentiment seems to be shifting. A recent poll, also by Bloomberg, shows 48 percent in favor of giving up deductions including mortgage interest in return for lower tax rates across all tax brackets.
Would losing the mortgage interest deduction affect your decision to buy a home? One thing to remember is that this deduction applies only to primary residences and second homes. You would still be able to deduct mortgage interest against rent received on rental homes. Would the 15 percent credit be a reasonable alternative? The Bloomberg article implies that it would benefit lower and middle income taxpayers who own homes possibly even boosting their ownership rates by as much as 2.5 percent.
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