I am often asked if I think the mortgage interest deduction will eventually be eliminated. It is one way our government is proposing to help reduce the national debt. It is definitely going to change and those making a certain amount won't be able to take the deduction. I came across this article that defines how this could affect you.
HOW FISCAL CLIFF COULD AFFECT THE MORTGAGE INTEREST DEDUCTION:
It is arguably one of the most popular U.S. tax
deductions, and for some it is the necessary stimulus to buy a home.
The
mortgage interest deduction, however, is now at risk, due to negotiations over
the so-called “fiscal cliff”—the year-end deadline for
large spending cuts and the expiration of tax cuts.
While it is impossible at this point to know
what the outcome will be, it is certainly worth running through the
possibilities.
First, let’s do a primer on the deduction as it
stands now:
The deduction lets homeowners reduce their
taxable income by the amount of interest paid on their mortgage. This can be on
the principal residence or a second home, but not on mulitple investment
properties. Taxpayers are eligible for this deduction only if they itemize.
Finally, the interest deduction is capped at $1 million of your mortgage.
This deduction, which is the largest
housing-related subsidy in the U.S. tax code, reduced income-tax revenue by
$79.9 billion in fiscal year 2007, according to the Office of Management and
Budget. So what is that in real cash savings to taxpayers? Number crunchers at
the Wharton business school did the math:
For those making less than $40,000 a year, the
average tax savings is about $100. But in that bracket less than one-quarter of
homeowners itemize deductionsl, so most don’t get anything.
For those earning up to $250,000, the average
savings, based on average mortgage amounts, would be $1,200-$2,600 a year. For
those earning more than $250,000, and 100 percent of them itemize, the average
savings is $5,400 a year.
Now to the proposals—and they are many.
One, released by the Simpson-Bowles commission,
would cap the mortgage interest deduction at $500,000 of the home’s value and
limit the deduction to primary residence. A bipartisan plan from Domenici-Rivlin would
limit the deduction to just $25,000 worth of mortgage interest.
Other proposals include eliminating the
deduction only for taxpayers earning $250,000 or more, ending the benefit for
second homes, ending the deduction entirely or limiting the amount of all
itemized deductions to $25,000. That last one was advocated by Mitt Romney, but
apparently some Democrats on Capitol Hill are starting to espouse it. Without one proposal leading the pack, again, it
is impossible to boil down the real cost to homeowners, but suffice it to say
that anyone in the business of home ownership is opposed to reducing the
mortgage interest deduction.
“It’s chilling the market,” said Jerry Howard,
CEO of the National Association of Home Builders. “Whenever there is
uncertainty surrounding the value of an American home, why would you expect
people to go out and buy a home? Or, just as much to the point, when there’s
uncertainty about the value of a home why would someone put their house on the
market to sell it, that’s why this whole debate to me is counter-productive and
is only retarding the nation’s economic recovery.”
“The mortgage interest deduction is vital to the
stability of the American housing market and economy, and we will remain
vigilant in opposing any future plan that modifies or excludes the
deductibility of mortgage interest," said Gary Thomas, president of the
National Association of Realtors.
Whatever the arguments for or against the
mortgage interest deduction, two things are indisputable. Going over the
fiscal cliff will kill the housing recovery, but said recovery is already so
tenuous that yet another barrier to entry will hurt.
—By
CNBC's Diana Olick
—Realty Check producer
Stephanie Dhue contributed to this report.
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