Should deductions for mortgage interest be kept? Would losing them affect your family?

As Congress and the White House negotiate the first major tax rewrite in decades, it would appear that deductions for mortgage interest may be on the chopping block.

From The Washington Post:

“Members of both parties have largely steered clear of detailed proposals so far. But plans put forth in the past year by President Obama and Mitt Romney to place limits on annual total tax deductions would likely crimp the mortgage-interest deduction for certain taxpayers. Top congressional Republicans also have expressed openness to limiting total tax deductions as part of an overall budget deal. In addition, the presidentially appointed Simpson-Bowles fiscal commission suggested scaling back the mortgage-interest deduction as part of its own set of tax-related proposals. “

“Current law allows homeowners to deduct the interest paid on mortgage balances up to $1 million, including on second homes, as well as on $100,000 worth of home-equity loans. The deduction overwhelmingly benefits wealthier families, partly because they tend to have larger mortgages and pay more interest, and partly because most low- and middle-income Americans do not itemize deductions on their tax returns. It also tends to favor homeowners on the East and West Coasts, as well as those in large cities such as Chicago, where average home prices are higher.”

“Edward Kleinbard, a tax expert and law professor at the University of Southern California, said the mortgage-interest deduction represents the kind of government “extravagance” that the country no longer can justify, given its fiscal troubles.”

“ ‘We simply cannot afford wasteful government subsidy programs anymore, and this is one of the most important examples of that,’ Kleinbard said. “It’s very much a subsidy to those Americans who need it least.”

“True enough, said Moody’s chief economist Mark Zandi, but the deduction nevertheless has become ingrained in the psyche of home buyers over generations, and reducing it would have real effects. “

“ ‘It’s a very visceral thing for people,’ Zandi said. ‘People account for it when they think about how much house they could afford to buy. You take that away, and house prices are going to weaken. They are going to decline.’ ”

So I am wondering how families feel about this deduction. Is that deduction an important one to your family? Would you miss it if they took it away? Are there other deductions that would hurt worse than that one? Do you think it should be on the table? Do you think it would hurt an already struggling house market to change it now?

120 comments Add your comment

missnadine

November 28th, 2012
11:25 pm

I would hate to lose that deduction! To me it is about $15 k for the year. I think they they should reduce, but maybe just take away from the option on a 2nd home, or home equity.

A reader

November 29th, 2012
1:45 am

The difference between taking that “standard” deduction and an itemized deduction is HUGE for most middle class American’s. If you rent, you generally cannot take itemize deductions. If you have a mortgage,then you generally can. For the average middle class taxpayer, losing this deduction would be devastating. Not only extra money owed, but also the feeling that owning the house is worthless, especially if it is underwater. Basically, if the government takes away THAT incentive then there is no reason to buy or own a home in this economy.

I have no issues with limiting the deduction. That is a WHOLE different story. I have NO ISSUE with limiting the deduction to say $50,000 of mortgage interest. That would mean that your house is worth at least $1 million dollars. That is WAY beyond middle class. If you can afford that kind of house then you mortgage tax “incentive” should be limited.

But everyone in DC talks at extremes. One group always tries to scare the taxpayer by saying the other evil group will cause havoc. Whatever

Anonymous for this one

November 29th, 2012
5:36 am

The deduction is the ONLY reason I’m a homeowner instead of a renter. There would be no incentive for homeownership (especially now) without the deduction.

FCM

November 29th, 2012
6:40 am

It will hurt middle class America for sure. I only bought my house a few years ago and that deduction is part of what allows me to pay for child care in the summer when I work. They need to cut SPENDING in needless programs first.

catlady

November 29th, 2012
6:42 am

I strongly support removal of the mortgage interest deduction. It is another form of welfare, and, remember, we are all about ending entitlements!

catlady

November 29th, 2012
6:47 am

I mean, it’s “socialism,” isn’t it, to use MY money to pay for something that YOU want? As it is now, non-homeowners are subsidizing the taxes of others. To quote some others, “Show some pride; do it on your own, and stop freeloading off others!”

Gail

November 29th, 2012
7:25 am

It really wouldn’t bother me at all if it were taken away. The only reason we itemize is because it helps us on our state taxes. The impact is lessened with interest rates so low. I guess if you were a single homeowner it might make a difference but for a married homeowner with the standard deduction at over $11,600 I don’t see the loss hurting that much. As the article said, most low and middle income people don’t itemize.
The deduction just reduces your taxable income. And,contrary to what some people will have you believe,most people’s effective tax rate is 15% or less. In 2009 the average tax rate for 80% of people was 15.1% or less.
But, maybe they should start with taking away the 2nd home and home equity deduction.

Van Jones

November 29th, 2012
7:26 am

Catlady, where do non-homewoners live? Do they rent? From landlords? Landlords whose total cost of ownership is lowered by deducting their mortgage interest? If the mortgage interest deduction goes away then rents go up.
Either way is fine with me as long as it applies to everyone. We all need a little skin in the game.

Parent

November 29th, 2012
7:30 am

I think they should do away with the mortgage interest deduction. Sure it would mean my taxes would go up some, but I think we all need to be part of the solution. What is the purpose of the deduction? To help people become homeowners? The benefits don’t start until you make at least $50,000 per year (due to the standard deduction). If you can’t afford the house without the mortgage deduction, then you probably are in too big of a house. The people who benefit the most are people who own $1 million dollar houses and second homes and luxury yachts and motorhomes (yes, they can be claimed) – these people don’t NEED the deduction.

By the way, I am also for a minimum 5% income tax on ALL people, regardless of how little they make and I am for the abolishment of the EITC. I am also for taxing capital gains at the same rate as any other income.

Georgia

November 29th, 2012
7:35 am

a home is such a huge expense with maintenance thrown in. Have you ever calculated the yearly cost just to mow your lawn? Removing the home interest deduction would be a market killer, and what’s left of our economy would flush down the average home’s puny 1.6 gallon toilet. (another issue for another day)

Jeff

November 29th, 2012
7:37 am

You can raise all the taxes you want, but history tells me they’ll spend it and even more.

We are broke. Plain and simple. It’s time for EVERY government department to take an across the board cut. Not a fake cut in the rate of growth. A cut. 2%, 5%, whatever. Everyone.

Then again, we deserve the government we elect. In the most basic sense, they are representative of us, narcissistic, greedy, living beyond our means, entitled, procrastinating, blaming everyone else, etc etc.

Marc Faber

November 29th, 2012
7:37 am

Well, Mother Jane Goose? You love to talk down about people who are on food stamps – getting a “hand out” yet I’m sure you love that mortgage deduction. I’m curious to read her justification….

Rodney

November 29th, 2012
7:47 am

I PREFER to rent, so I don’t really have a dog in this fight. This tax credit seems to be the only reason people keep pushing me to buy a house/condo – when I calculate what I don’t have to pay for by renting (lawn care, much higher insurance than renter’s insurance, maint costs, etc) I come out way ahead in the $$ game by renting. With way fewer headaches – toilet breaks? Call the landlord. Outdoor lighting blown? Landlord.

Things might be different were I married with a family, but as it is, renting is preferable.

Mayhem

November 29th, 2012
7:58 am

How is it a handout? I paid my mortgage every month, on time. Yes I take the interest deduction, as I write off a good bit. It won’t hurt me if it’s changed. I can manage my money. We have no debt other than the house. No credit cards, and our cars are older and paid for. I do write off the ad valorem on the cars that are in my name.

I agree with Jeff. EVERY government department needs to take a reduction. And our elected officials need to start taking care of us, as we elected them to do. But now, all politics is, is a power hungry group of idiots, who have no clue how to live within their means. It’s called a budget. When you run out of money, stop spending. Don’t go looking for more money to spend, just stop. That’s how the average American does it. Oh wait, no they don’t. They run out and put something on a credit card. There you go. Add up the debt, figure out how to pay it off later……

Laurie

November 29th, 2012
8:12 am

I am a middle class home owner, and taking away this deduction would hurt, but it wouldn’t kill me. I have no problem paying my fiar share to keep our country going. But I hope that congress looks at other areas of our tax code that favor one group over another. For example, why are capital gains only taxed at 15%? Investment income is just that, INCOME. Also, refundable earned income credits and child tax credits need to be looked at as well. The government should not be in the business of paying people to work low wage jobs, nor should they be rewarding people for having a bunch of kids.

Out by the Pond

November 29th, 2012
8:14 am

The interest deduction is one of the biggest cons that the banking industry has pulled on the American public. Where is the logic that I give a bank $1.00 so I can get back $0.25? When RR eliminated interest deductions for consumer debt the public were coned into adding debt to their homes. It became a habit and when the housing market made a correction, many found themselves upside down on their mortage. The MID has enabled some to become home owners who other wise could not aford to, but it also enabled those who had no business purchasing a home the opportunity to do so. So now we have a glut of vacant homes. Limit the MID to $15,000, and eliminate second and third homes.

Parent

November 29th, 2012
8:14 am

“Landlords whose total cost of ownership is lowered by deducting their mortgage interest? If the mortgage interest deduction goes away then rents go up”

I hate to tell you, Van Jones, but it doesn’t work that way. When you rent your house, it becomes a business and is subject to depreciation schedule, so you not only get to write off the interest, but the principal also. That would NOT go away, since it is part of how you calculate profit for a business.

motherjanegoose

November 29th, 2012
8:15 am

Well, we owe less than 7 years on our mortgage and so, for me, it would not be critical. Not good for my kids though.

Our country is in trouble and no one wants to kick in any more $$$. it is a finger pointing game.

I am not an economist so I cannot speak of the ripple effect of cutting out that deduction, with any credibility. I do think the housing industry has a strong effect on the economy and I personally think homeowners make better neighbors than renters, as you are invested in your property and you do not just fly the coop when you feel like it. They are also more committed to the schools in the neighborhood. This is why some areas fight apartments.

People that buy houses tend to be more stable and better at managing their money, so we are punishing them? Oh that’s right, we are punishing the people who make good choices to give their $$$ to those who make bad choices. Now, I remember.

What does this mean Georgia: Have you ever calculated the yearly cost just to mow your lawn?
We mow our own but we do have it sprayed for weeds and such. Truthfully, we put in $3000.00 worth of sod last summer as the trees matured and the shade was killing our back yard. We have been here 15 years.

We are looking into MAYBE buying a condo for vacation. This would impact that decision for sure. It is not something we have to have but thought it would be nice for our children. I think investors would be up in arms about this. Many people rent a condo for their vacation and that would be impacted too.

DB…we need your help here!

Mayhem

November 29th, 2012
8:22 am

We will never own another home again. After this one, we plan on renting a bungalow on an island in off the coast of South Georgia.

Out by the Pond

November 29th, 2012
8:22 am

People who earn their money through investment and pay Capital Gains rather than income tax, also skip paying Social Security and Medicare taxes. Eliminate the difference between passive money, investment, and active money, that which is created by labor and most of our financial problems will be solved. History has shown time and again that lower taxes does not create jobs or expand the economy.

Jeff

November 29th, 2012
8:27 am

Laurie, I understand that at face value, 15% on investment income doesn’t seem fair. But if I have saved my money (after paying income taxes, medicare tax, state tax, etc) instead of spending it (and paying a 7% or so sales tax on a purchase), why should the government get another cut of the money I invested, spent time researching, saved (delayed gratification) instead of spent (immediate gratification)?

For me, the real question comes down to, at what point has the governmetn taken enough of a dollar I have earned? They took it on my paycheck, they took some of what’s left over in sales taxes when I buy, the take some of what’s left over when I earn interest on a savings account, they take some of what I’ve saved when I die in an inheretence tax, on and on and on. Yet we’re STILL BROKE. Why should I believe for a second that if I give them more money, we won’t still be broke?

EG

November 29th, 2012
8:41 am

Keep the mortgage deduction, and get rid of the arbitrary $110K income cap on SS taxes.

Parent

November 29th, 2012
8:49 am

I agree with Jeff that there needs to be serious cuts, AS WELL as revenue increases. But be careful when you talk about where to cut. Social security and medicare each have dedicated revenue streams that should be balanced to get them on a stable long-term balanced budget (internally). Social security only needs small changes to make it self-sustaining (if Congress doesn’t default on what the US owes SS) – maybe a small increase in the retirement age or put autoimatic COL increases on hold for a few years (or both). Medicare is awash in red ink and I believe that they need an immediate large increase in the Medicare tax to make it self-sustaining, Over the past 20 years, medical costs have increased over 300% while wages have only gone up 70%. So we are not taking in enough in taxes to pay for increased Medicare expenses. Add in the Midicare Pard D which seniors are enjoying today that never paid ANY tax (and still we don’t) to cover it. It needs to be rescinded for current Medicare recipients and implemented in degrees AFTER tax increases to pay for it. Another program that has dedicated funds is the Highway transportation program – taxes from gas taxes should fund this and it should be balanced – if you want more road construction/maintenance – increase the gas tax. The rest of the budget is fair game for cuts (and should be cut). Of the remainder, Defense (all programs) accounts for 40%, interest for 17% (have to pay that or default on Savings Bonds), medicaid is about 11% and welfare is about 9%.

Dan

November 29th, 2012
8:53 am

“Why should the government get another cut of the money I invested…?”

The government doesn’t get “another cut” of your money. Capital gains tax is paid on…wait for it…capital gains, not principal investment.

Parent

November 29th, 2012
8:53 am

“But if I have saved my money (after paying income taxes, medicare tax, state tax, etc) instead of spending it (and paying a 7% or so sales tax on a purchase), why should the government get another cut of the money I invested,”

You DO NOT have to give the government another cut of that money. YOu only have to give the government a cut of the INCOME that the money generates for YOU, just like I give the government a cut of the income that my WORK generates for me. All income spends the same.

Alberta

November 29th, 2012
8:54 am

Conservatives hate subsidies. Why stop with mortgage interest deduction elimination? Let’s get rid of deductions for medical/dental expenses, real estate tax, personal property tax, and miscellaneous job expenses. And while we’re at it, let’s get rid of the Gifts to Charity income tax deduction, too.

One can’t make an argument that one subsidy is bad and yet another one should stay. A subsidy is a subsidy, plain and simple.

Parent

November 29th, 2012
8:56 am

“Keep the mortgage deduction, and get rid of the arbitrary $110K income cap on SS taxes.”

The problem with this is: SS is based on how much you put in. Yes, the taxes are capped at $110,000 but also the BENEFITS are capped, also. If you taxed the higher earners, then, according to the way the program is set up, you should return more money to them, also. That doesn’t help anything.

Van Jones

November 29th, 2012
8:56 am

I hate to tell you, Parent, that it differs based on whether you own a rental house next door or an apartment complex. Apartment complex – probably a business. Rental house(s) next door – probably not. The business tax code is another animal entirely.

Mayhem

November 29th, 2012
8:57 am

CASH!!! They can’t tax the cash stuffed in the mattress. LOL.

They can tax your investments, as you have made money on them (dividends), and it’s considered “income”.

I also believe that once you hit 75 years of age, you should NOT pay another dime in taxes. Consumer tax yes, but no capital gains, investment taxes, etc. You should be able to keep everything you have worked hard for.

Also, quit taxing the inheritances. It’s NOT income. It’s what someone worked their entire life to save, and pass it down to their children. They have already paid the taxes on all that money. And when I inherit my parents money, I’ll get taxed on that.

Whatever happened to to Fair Tax?

Parent

November 29th, 2012
8:58 am

“And while we’re at it, let’s get rid of the Gifts to Charity income tax deduction, too. ”

I agree with that. If you are only giving to charity because of the tax deduction, you aren’t very charitable. The way it is now, you force the government to contribute to your charity also.

Parent

November 29th, 2012
8:59 am

“Rental house(s) next door – probably not”

I have rented out a house that I used to live in – it works the same as if you own an apartment complex. I know what I am talking about.

Van Jones

November 29th, 2012
9:15 am

“I know what I am talking about.”

Bless your heart. Of course you do.

Techmom

November 29th, 2012
9:19 am

I don’t have a problem with limiting it but I do think it’s going to hurt the middle class. Personally I think it’s going to be a huge hit to the housing market by taking away an incentive to actually buy.

@Parent – renting out a house you previously lived in may make you a landlord but it does not make that house a business write-off. It is considered a passive activity and is limited by AGI.

Techmom

November 29th, 2012
9:28 am

@Parent – do you have a real estate license or multiple rental properties? The rental loss deduction begins being phased out when your AGI is $100k and is totally gone at $150k. Unless you qualify as a real estate professional or the properties were bought under a business, the losses of a rental which are considered personal property are limited. This law typically does not impact the real estate investor b/c they likely bought houses specifically as investments under a business entitiy. It hurts homeowners who moved but could not sell their previous home (hello crappy housing market).

http://www.wemanageproperty.com/askthecpm/?page_id=21

An Accidential Professor

November 29th, 2012
9:34 am

Both my ex husband and I make about $50K per year. I live in a reasonable home and pay a fair amount of taxes. He has a mortgage that costs over $20K per year which means that he pays absolutely no income taxes and enjoys a massive refund check. He is the 47%. It hardly seems right to reward people for living above their means.

ATL Born and Raised

November 29th, 2012
9:39 am

@Van Jones

A house you rent out still goes on the schedule C on your personal income tax return as a business deduction. All expenses are fully deductible including mortgage interest.

Mayhem

November 29th, 2012
9:52 am

@Accidential – why does he not pay income tax? Is he working? How do you not pay income tax when your mortgage is over $20K per year??? can you please explain?

An Accidential Professor

November 29th, 2012
9:59 am

He pays taxes through payroll but because of his mortgage interest, the total deduction offsets his tax obligation. He gets back every dime he pays in his refund check. And brags to me about it!

Tom

November 29th, 2012
10:10 am

The discouragement of private home ownership is just another key to the emergence of the socialist/Marxist “utopia” the current administration and its enablers envison for our country.

Mayhem

November 29th, 2012
10:15 am

@Accidental – thank you. Couldn’t wrap my brain around that one….LOL

Tom – I agree!!!! You can thank the Entitlement Generation for that. They don’t want to work, they want everything handed to them, and that’s the people who voted for this current administration. Nancy Pelosi, Harry Reid, Obama….they all scare the crap out of me.

the red herring

November 29th, 2012
10:23 am

yes do away with mortgage deductions– in fact do away with all deductions and let’s have a low and fair tax rate on everyone above the poverty line. why should people with nice houses get tax breaks for borrowing money. if they can’t afford the house and interest on it then they shouldn’t buy until they can. if that lowers the price of real estate and slows down the real estate market then perhaps more people can buy at lower prices and not have to depend on an deduction for interest they pay on the home. let’s level this playing field across the board–not just on 200k and above. the takers need to have some skin in this game rather than just live off the taxpayer. politicians should stop buying votes with taxpayer money.

Denise

November 29th, 2012
10:29 am

It would impact me because I have few other deductions besides that, those from payroll (SS, etc.), and charitable gifts. Losing tax deductions on charitable gifts would impact me more because I give more to the church than I pay in interest. My house is old and small so my mortgage is inexpensive, just like I like it. I live far below my means. I do not believe anyone owes me anything and work very hard for my money and make quite a bit of it…and save quite a bit of it. I am not a part of the Entitlement Generation and I voted for Obama. What a surprise! So, no Mayhem, not all people who vote for President Obama are freeloaders. I really get sick of that assumption.

iRun

November 29th, 2012
10:41 am

I think it’s fine…the way they’re talking about doesn’t sound like it will hurt middle class folks. The current set up is a total tax shelter for the upper income folks and it needs to be shut down.

Teacher, Too

November 29th, 2012
10:49 am

I would be hurt. I finally, finally bought my first home at age 46, and I am looking forward to being able to itemize. If I lose the deduction, then why did I purchase a home if I could spend the same amount of money and rent? When the apartments get run down, just move to another one– no worries about having to sell a home. The incentive to own tends to go away.

Maybe, instead, put a cap on the amount of the deduction.

who knows what evil lurks in the hearts of men

November 29th, 2012
10:51 am

@Anonymous for this one…..If the interest deduction is the ONLY reason you have purchased a home instead of renting, you’re not very financially bright.

What you’re telling me is that if you were 25 and had an income tax rate of 15% and you could get into a $200K, 30 year fixed mortgage with a 3.5% interest rate, you would pass on buying a house and paying $900 a month for that house because you wouldn’t be getting an $87.50 tax break in the first month of the mortgage that decreases every month after that. Even though if you stayed in that house for the next 30 years and ended up NOT having a house payment AT ALL at the age of 55, because you didn’t get an $18K tax break OVER 30 YEARS…you think it’s better to just rent for the rest of your life. Even if you got a $100 break each month in renting vs owing and you put that $100 in the bank and earned a safe 4%, at the end of 30 years, you’d have 60K in cash vs a house that was worth $200K if it never appreciated a dime. That 60K will earn you $2400 a year in interest at the same 4% rate and you’ll still be paying your $800 a month in rent until the day you die.

Seriously…you’ll only buy if you get an interest rate deduction? Do you lease cars and get your appliances and TV’s from RTO because the government won’t subsidize those purchases too?

DB

November 29th, 2012
10:53 am

The whole thing is such a mess, it takes smarter people than me to figure it out. Personally, I’m a huge fan of the Fair Tax. No tax code should be this complicated that it takes someone going to school for 5 years (that’s what it takes for a CPA these days) to even begin to figure it out. The mortgage interest deduction only applies to the first $1 million of debt, and the first $100K in home equity. With interest rates these days, someone with a $1 million loan with a 2.75% interest rate, a $1 million loan has a little less than $25,000 in interest. So we’re not talking about collecting monies on multi-million dollar mortgages, here. Would the mortgage deduction be eliminated across the board for investment housing, too? What about for businesses — should businesses get the expense deduction for mortgage on property their business holds?

I do think it’s ironic that a President who basically lives in public housing should be lecturing us about mortgage deductions. :-)

With interest rates this low, it won’t have as much of an impact. However, when (not if) interest rates begin to rise, THAT plus the elimination of the deduction is going to do a number to the housing industry that would make the current short-sale bubble look like a hiccup. How many of us remember the housing interest rates of the Carter years, when interest rates were 15-18%? The only segment of the population that this is going to have a significant impact on is the middle class — the ones who buy the less-than-million-dollar mansions (or, in some cases, $1 million hole in the walls, like in NYC!) It’s not going to affect renters. lifestyle It’s not going to affect the wealthy’s lifestyle. But it WILL affect the quality of life for the middle class.

who knows what evil lurks in the hearts of men

November 29th, 2012
11:01 am

I think the government should just cap the amount of itemized deductions people get. If they want to pay off their houses and give a boatload to charity and write that off, that’s cool with me. If they want to use it all up on because they want to pay a bank $3K a month in interest so that they can get a $450 a month tax break, go nuts.

but if you think about it……let’s say some couple who fell on some bad times and got behind on some payments and finally gets back on their feet and each earn $75K a year for a household income of $150K a year job decides to buy a $400K house at a 7% interest rate, they’re paying the same in interest as someone who makes $500K a year and buys a $800K house. Is that really sending the right message? I would think that just tells those folks who are most vulnerable to overspending that the government encourages that.

So just cap the amount of itemized deductions eligible to EVERYONE and there will be no judgement as to who “deserves” to be eligible for them and who isn’t.

who knows what evil lurks in the hearts of men

November 29th, 2012
11:08 am

@DB..the tax code is not so complicated that the vast majority of tax payers need a CPA. Trust me…I know…i am one. The reason people pay a CPA is not because they can’t do it on their own, they pay me for the same reason I pay a plumber.

I’m smart enough to fix my toilet, but I’m not good at it…I have no aptitude for it….it would take 5 times the amount of time and aggravation as the plumber…and quite frankly, I can make more by doing tax returns in the amount of time it would take me to do the plumbing job than it would cost me to pay the plumber.

Fear is why most people go to a CPA…not lack of aptitude of complexity of the code. Oh and H&R block promising to give you a loan against your refund is anything carrot that is dangled and marketed quite well.

who knows what evil lurks in the hearts of men

November 29th, 2012
11:10 am

The mortgage interest rate was never intended as a deduction to last in perpetuity. By definition, as you pay down your loan, your deduction is supposed to reduce as well. The reason the deduction was passed into law was to incentivize people to buy a home AND PAY IT OFF so you didn’t have a bunch of old people with limited income resources out on the street because they couldn’t afford rent on a place they don’t own.

usually lurking

November 29th, 2012
11:16 am

If you need the mortgage interest deduction to afford the house, then you are buying a house that you cannot afford. Just my opinion.