Mortgage Interest Deduction: Do You Need It?
In case you missed it, The National Commission on Fiscal Responsibility and Reform, released its recommendation last week, including the proposed elimination or limitation to the mortgage interest deduction ("MID") for homeowners.
In brief, the commission proposes to limit the mortgage interest deduction to only primary residences (today, they apply to second homes as well), and cap the deduction to $500,000 worth of mortgages (today, it's $1 million).
As you can imagine, the real estate industry is in quite an uproar over any changes to the mortgage interest deduction.
Ron Phipps, the President of NAR, has issued a pretty strong statement in opposition, calling the mortgage interest deduction "vital to homeownership and the economy" and vowing to "remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest". The National Association of Home Builders is also, as you can imagine, opposed to messing with the MID.
The current thoughts are that eliminating or limiting the mortgage interest deduction would crash home values by anywhere from 15 percent to 20 percent, dry up buyer interest (even talking about this is drying up buyer interest, actually, as buyers will sit and wait to see what happens), make investors rethink all of their financial models, and so on. It won't help the industry, that is for certain. I believe whether the National Association of Realtors, together with its allies in the housing industry, can defeat this proposal is potentially central to the identity of NAR itself and the future of the industry as we know it.
But this is all sort of inside-baseball industry stuff.
NAR has done an online survey of 3,000 homeowners that shows that 3/4 of homeowners and 2/3 of renters think the mortgage interest deduction is really very important to them. But given the sponsor, there is reason to be skeptical about how people really feel about the MID.
I just don't see, given the political mood of the country today, who actually supports the MID, which is between $100 billion and $130 billion a year in "lost revenues" to the Feds.
Those on the Left dislike the MID because it's a tax giveaway to the wealthy. Here, for example, is The New Republic arguing against the MID, because it's a tax break for the rich:
From the numbers above, it's clear that the benefit derived from the deduction is almost perfectly increasing with income. Low- and middle-earners are less likely to itemize their returns, which makes them unlikely to benefit from the mortgage-interest deduction. And because they make less money, they pay taxes in a lower bracket-meaning that every dollar in deductions reduces their tax bill by less than it would for someone in a higher bracket. Calling the mortgage-interest deduction a middle-class tax break essentially requires us to define someone in the 80th or 90th percentile of earnings as middle class. But they're not; when you make more than 80 percent of the country, you're rich, even if you don't want to admit it.Those on the Right dislike the MID because it's a government subsidy that distorts free market prices. Mark Calabria of the Cato Institute, for example, calls for abolishing the MID here:
Given that the dominant theme of the political life of the country right now is a citizen's revolt against high taxes, high government spending, and high debt (I assume you've heard of the Tea Party movement by now), I can't see who on the Right would stand up in full-throated support of subsidizing more debt.
"All it does is run up house prices [here in the US], which to me makes housing less affordable, not more," he added. "It also increases the volatility of prices."
And the great mythical center, which may or may not exist, just has very little idea of what's going on, though they are remarkably up to date on who is left standing in Dancing With the Stars.
The difference between the two sides, right now, seems to amount to the political left arguing to eliminate the MID so the $100 billion could be used on other programs, while the political right wants to eliminate the MID so that taxes can be cut across the board.
I suppose the thinking is that homeowners who are today deducting their interest payments from taxes would throw a giant hissy fit if Big Brother took it away. But I have to believe that American taxpayers, at least those paying attention, are smarter than that.
Suppose you have a 30-year fixed rate $750K mortgage at 5 percent interest rate, and since you have such a high mortgage, your income is very high as well (say $400,000 a year) putting you in the top bracket of 35 percent. The MID is worth about $13K per year to you, and given an amortizing loan, I'm seeing the MID be worth $63,099.83 over the first five years of your mortgage. If the Commission's recommendation, of capping the MID to the first $500K of your primary residence, becomes law, your tax break is only $8,700 or so a year, and $42,066.55 over the first five. The difference is $21,033.28 for someone making $2 million over the same five year period.
Meanwhile, the same commission report recommends dropping the top tax rate from 35 percent to no more than 29 percent. That results in $24,000 in direct savings to you from the tax cut, Mr. $400K-a-year, or $120,000 over the first five years. Is there someone in America who wouldn't take this deal? Give up $21,000 and get $120,000?
It would only suck if the elimination of the MID isn't matched by anything for the taxpayer anywhere else: That's a straightforward tax increase, and there are people who love that sort of thing, but not many.
Thing is, I could be dead wrong, because voters and homeowners don't have to be rational, or think in the national interest, or care about anything besides, "I want what's mine!" So, here's my question to the audience of AOL HousingWatch, a self-selecting group that cares about housing issues: Do you care about the mortgage interest deduction? How much? Would you trade it for a general tax cut (or if you're a liberal, for extending unemployment benefits or whatever other social program you support), or no way, keep yer grubby paws off my tax break!
For insights on tax advantages see these AOL Real Estate guides:
- Four Ways to Benefit From a Cash-In Refinance
- How to Lower Your Property Taxes
- After the Homebuyer Tax Credit: Mortgage Tax Deductions
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