Once again, politicians are talking about doing away with – or at least limiting – the mortgage interest deduction. Yanking the deduction away suddenly would be disastrous for people who bought houses figuring the interest deduction as part of the equation. Many middle class families would suddenly owe $5,000 or more per year in additional taxes. The housing market, already reeling, would fall farther. As these hard-hit families have less to spend elsewhere, the economy would dive.
You can stop worrying about a sudden elimination of the deduction altogether. It’s not going to happen – it would be political suicide. That won’t keep the government from tinkering with the rules, however.
Proposed Changes to the Mortgage Interest Deduction
The safest place for politicians to raise taxes is by limiting deductions for the “rich.” The mortgage deduction is already limited to interest on the first $1,000,000 of mortgage indebtedness. A current proposal is to bring that limit down to $500,000. In some parts of the country, where a new house still sells for less than $200,000, that would affect almost no one. In other areas, for example in San Francisco, a median-priced home costs over $600,000. An arbitrary $500,000 nation-wide limit would hit many decidedly “non-rich” families hard.
Another proposal is to give lower income taxpayers a credit in lieu of a deduction. If you qualify, you may actually benefit more from a credit than for a deduction. Deductions only decrease your taxable income; credits directly reduce your income tax bill, usually by a percentage of the expense.
What Should I Do?
If your mortgage balance is less than $500,000 and your income places you in the middle class, you don’t need to do anything. Your deduction is not likely to change, or if it does, it will be replaced by some kind of credit.
If you’re considering buying a home with a mortgage of more than $500,000, be aware that you may not always be able to deduct all the interest. You may want to start paying down your mortgage as soon as possible.
It’s never been a great idea to buy a larger home than you can comfortably afford or keep a large mortgage balance just to get the mortgage interest deduction. Talk of reducing the deduction may help convince more homebuyers to stay within their means.
Remember that even if your mortgage is over the limit, you can still deduct the interest on the amount up to the limit. For example, currently you can deduct interest on the first $1,000,000 of mortgage indebtedness (plus interest on $100,000 in home equity loans). If your first mortgage has a balance of $1,000,001, you deduct all but the interest on the $1, which is insignificant.
What if I’m a Renter?
There’s also talk of implementing a renter’s credit. Renters already benefit from the mortgage tax deduction taken by their landlords, however. If investment property owners couldn’t deduct mortgage interest, they would have to charge renters significantly more. A renter’s credit is likely to be a symbolic gesture, if it is passed at all.
Other than a possible small renter’s credit, changes in the mortgage interest deduction laws shouldn’t affect you directly. If the deduction for homeowners is limited or taken away, the change would almost certainly not apply to investment property owners.
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You make the assumption that the landlord has a mortgage. If there s no mortgage, how is a renter receiving any fair treatment. You presume that savings are passed on to renters?
Maybe it was the government’s subsidies of housing that helped create a bubble? Also, via cash out refi, it encourages irresponsible personal finance.
Also, correct me if I am wrong, but mortgage interest of your primary or second home is wholly different than that of an investment property. Your article deals with the former, the latter is a business expense which is not a part of the discussion. Eliminating the mortgage interest deduction would thus have no effect on renters.
But what about property values? All those over-$500K property sellers would face increasing price pressure on any amount over $500K. That could really hurt property values just as badly as raising the interest rate: most people make housing-price decisions based on the monthly payment (presumably after taxes). Here in west Los Angeles, a $500K house is on the very low end even now.
There is no mortgage interest deduction in Australia. Taxes are structured differently with something closer to a flat tax for income. It is still a graduated system with far fewer deductions. It works fine, if it is implemented properly. But, you couldn’t just suddenly yank the deduction without providing some other method of relief (reduction elsewhere) to offset loss of the deduction.
I would like to see mortgage interest deduction eliminated for all mortgages over $200k. Why should uncle sam help pay for your house when he doesn’t help pay for my 401k ?
Phase it out over 10 or more years.
No tax breaks for ANYONE! Simply tax all goods and services so everyone pays…rich, poor, illegal, drug dealers, tourists, etc. No one should ever file a tax return, disband the IRS. The US Tax code can be written on one sheet of paper.
House prices will drop… Property Tax revenue would drop… Local governments and schools would be hurt by this, unless they raise property tax rates, of course that would make property values drop more. Eventually, the dollar will be useless, and we can start trading with bushels of wheat.
no offense, but the gov’t DOES help pay for your 401k. your 401k contributions are taken from your PRE-TAX paycheck (gross) on the assumption that when you retires, you will be in a much lower tax bracket so that when u start making withdrawls the funds are taxed at that lower rate.
The fact that you are employed AND contributing to a 401k using GOV’t assistance and possibly getting an employer match may be quite a bit better that most people in america have it.
the same way ur kvetching about home owners getting a DEDUCTION (this is not a CREDIT which is MUCH better), there are problaby MILLIONS of americans that can complain about your ability to put $$ away tax “free” in a 401k when they dont have that ability.
its the same way the private sector employess complain about GOVT employees getting a full pension for LIFE when only contributing a few %. the diff between that pension and your 401k is when you run out of $$, youre screwed. they have the GOVT backing their payments.
*caveat* that govt backing may not mean a whole lot in a decade, but that said, when the govt decides to raid retirement accounts, they will do it to everyone. 401k, pensions, ira, everything.