Massachusetts Home Buyer Guide

There have been many consequences discussed if the politicians in Washington don't come to an agreement on the so-called "fiscal cliff" budget and tax crisis by December 31, 2012. 

One aspect discussed in this blog has been the potential consequences associated with deciding to limit or eliminate the federal mortgage interest tax deduction (See Loss of Mortgage Interest Deduction Would Hurt Massachusetts). The mortgage interest tax deduction is not set to expire, such as other tax breaks, on December 31, 2012; however, there is a lot of discussion about limiting it or eliminating it.

In general, any homeowner who pays U.S. taxes and who itemizes his or her federal taxes can deduct mortgage interest attributable to primary residence and second-home debt totaling $1 million, and interest paid on home equity debt of as much as $100,000.

Like any political issue, there are arguements both for and against eliminating the mortgage interest tax deduction. There have been several suggestions for limiting or eliminating the deduction. The following are just a few such suggestions. 

• Reduce the $1 million cap by $100,000 a year or reduce the cap to $500,000. 

• Change the mortgage interest deduction to a 15% tax credit.

• Reduce the mortgage interest deduction for upper-income taxpayers; hence, they’d only receive 28 cents on the dollar, even if they’re in a 33 percent or 35 percent federal tax bracket and can now deduct 33 cents or 35 cents on the dollar.

In 1986, Congress eliminated the interest tax deduction on most consumer debt, including credit cards and car loans, but the mortgage interest tax deduction for buying or improving a home was not eliminated. 

Arguments Against The Mortgage Interest Tax Deduction

Those opposed to the tax deduction typically make arguements that call into question whether the government should promote homeownership and who actually benefits from the tax relief.

• As you probably expected, opponents of the mortgage interest deduction argue that it primarily helps the wealthy, since high-income taxpayers are more likely to itemize their federal tax deductions and to own homes. About 90 precent of taxpayers earning more than $100,000 itemize, while only 18 percent of those earning less than $50,000 itemize on their federal tax returns.

• Taxpayers who choose not to itemize deductions are allowed to use the “standard deduction” on their tax returns. They do that because it gives them a bigger tax break than itemizing and using the mortgage interest deduction.

• Some critics believe that in the aftermath of the recent mortgage crisis, the U.S. needs to reconsider its favored tax treatment of homeownership.

• Limiting or eliminating the mortgage interest deduction would generate revenue for the federal government that could be used for reducing the U.S. federal budget deficit and national debt.

Arguments For The Mortgage Interest Tax Deduction

The proponents of the mortgage interest deduction argue it provides middle-class taxpayers
with a needed tax break and home prices would decline, if the mortgage deduction were limited or eliminated. 

• The National Association of Realtors (NAR), a trade organization lobbying hard to keep the status quo, estimates that more than 60 percent of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000. 

• A large number of those high-income taxpayers critics beleive don't need the deduction live in areas where housing is especially expensive, such as California, New York and the Greater Boston Area. In high-cost housing markets, lowering the $1 million cap would add a tax burden on families who already must pay high prices for reale estate.

• The NAR claims homeowners already pay 80 percent to 90 percent of the income tax in the U.S., and among those who claim the mortgage interest deduction, almost two-thirds are middle-income earners.

• Home prices could fall 15 percent, the NAR claims, as homebuyers discount the value of the mortgage interest tax deduction in their purchase offers. In addition, other proponents believe tampering with the mortgage interest deduction would derail the housing recovery.

• It’s faulty to link the mortgage meltdown to the country’s support for home ownership. The meltdown is rooted in lax underwriting and faulty ratings by credit rating agencies of the securities backed by the mortgage, the NAR believes.

• Protecting the deduction promotes housing. In supporting the mortgage interest tax deduction, the government helps ensure that families can follow the same path to homeownership that so many others have already traveled.

• Having a tax deduction for mortgage interest makes owning a home more affordable because the deduction lowers homeowners tax burden. U.S. Census data shows 37 percent of homeowners with mortgages spend more than 30 percent of their income for housing, according to HouseLogic.com, a Web site created by the NAR. Paying less for housing means having more disposable income for savings and other household expenses.

The San Antonio Express-News published an interesting article December 24, 2012 on what it described as the "claims" and "facts" regarding the mortgage interest tax deduction. 

What do you think? Should the mortgage interest tax deduction be limited or eliminated?