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Mortgage Interest Tax Deduction

Mortgage Interest Tax Deduction

A super-committee- tasked with identifying areas in Federal spending that could be trimmed or cut completely for greater savings in our Nation’s future- was created in the wake of the U.S. Congress’ inability to come to an agreement on budget spending for weeks on end in the month of September. In November 2011, the super-committee identified the tax deduction for personal home mortgage interest as a major issue and a way to increase tax revenue.

The mortgage interest deduction has been a favorite of the middle class and homeowners because it represents one of the largest itemized deductions available on the IRS Form 1040 and 1040A. Not only does it represent a large reduction in taxes owed annually for eligible tax filers, but it adds to personal discretionary income that would otherwise be spent solely on loan interest paid to the bank lender.

Current beneficiaries include those filers who itemize their taxes. On the other hand, if a filer takes the standard deduction, the benefit is not allowed. If eligible, the tax deduction reduces earned income dollars reported. This in turn reduces taxes owed for the year since the adjusted gross income decreases before taxes are applied. All homeowners with outstanding mortgages benefit.

Opponents argue that wiping out the mortgage interest deduction would represent a significant tax revenue increase for the federal government. Approximately $131 billion in taxes are missed annually due to the existing deduction allowance. As a result, the mortgage interest deduction represents a windfall for the tax filer that he doesn’t absolutely rely on. Proponents of the elimination do not see any improvement in house sales as a result of the deduction. Instead, they believe the tax code should expunge the subsidization of house buying.

The elimination of the deduction is highly opposed by anti-tax groups, the real estate industry and consumer proponents. Although the proposal would not create a new tax per se, it would effectively raise taxes owed to the IRS annually by thousands of dollars per family. For many homeowners the interest deduction is one of the main benefits of homeownership. With the current state of the housing industry, any change to the mortgage interest deduction could have severe consequences. It would decrease the affordability of homes among new home buyers and increase the financial strain on many existing homeowner’s already facing falling values and economic hardship in this tough economy.

Tax revenues may also be hit as every home sold creates huge tax revenue for both local and federal governments. When a home is sold you have tax income being created for the real estate agents, mortgage professionals, appraisers, home inspectors, insurance agents, title companies, and escrow companies etc. all of whom pay taxes. Not to mention the tax on capital gains. As the housing
market struggles to find its footing, it would be a shame if the rug is pulled out from under it.

Another, more palatable option is one that was proposed by the Obama administration in the Fall of 2011. It calls for a revision of the deduction instead of elimination. In the proposal, those earning greater than $250,000 annually would be affected. This adjusted version is expected to generate more than $320 billion in new tax revenue if implemented (over 10 years). This is a concept and should be considered, but not at a time when the housing market is attempting to dig out of one of the most challenging markets since the Great Depression.

By Michael Shane

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