Overhauling the tax code is on the minds of lawmakers now that the Bush Tax cuts are set to expire, but while some adjustments are applauded, members of the housing industry are up in arms regarding the proposal to adjust the mortgage interest tax deduction. Being in the middle of an incredibly fragile housing market, proponents of the tax deduction feel that homeowners need as many breaks as possible. In other words, now is not the time to make changes to a successful deduction.
The Tax Overhaul Proposal
As a part of a larger tax overhaul that would affect the tax code as a whole, the presidential deficit commission is looking to make changes to the mortgage interest tax deduction. Here are some proposed changes:
- Turn the deduction into a 12 percent non-refundable tax credit available to everyone (it is currently fully deductible but only available to those who itemize).
- Mortgage size would be capped at $500,000 (the current cap is at $1 million).
- Interest on the mortgages for second homes and home equity loans wouldn’t be eligible.
Lawmakers say that making these adjustments could save the Treasury Department $131 billion a year and help put a dent in the $4 trillion deficit, but proponents of the deduction say it would only slow housing market progress by hiking up the cost of home ownership for millions of people.
The Deduction Is Beneficial for Many Homeowners
The mortgage interest tax deduction gives homeowners a tax break on any interest they pay on loans secured to buy a home (main home or second home). It currently also can be used for a second mortgage, a line of credit or a home equity loan.
Deducting this interest has saved homeowners huge sums of money at tax time and is especially needed in this tough economy. This is why the National Association of Home Builders, the Center for Responsive Politics and other businesses and organizations that support the deduction are willing to fight the change.
Opponents of the proposal plan to fight it every step of the way since they believe it would result in a smaller tax break. CNN Money reported that a home builders association estimated homeowners in the 25-percent income tax bracket would get a tax credit worth less than half the amount of the deduction.
Some believe homeowners may not have as much to worry about as they think however, since the commission’s recommendations were meant to simply start a dialogue rather than pass a new law right away. With that said, it may not even garner enough support among its members to make official recommendations to Congress.
