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Is the mortgage tax break in danger?

It's hard for federal budget-cutters to ignore the tens of billions of dollars Congress could save by eliminating the taxpayer mortgage interest deduction.

By Marilyn Lewis Feb 21, 2013 6:13PM

Image: House with bills (© Creatas/age fotostock)As Congress struggles -- and maybe fails -- to trim the federal budget deficit, it's hard for budget-makers to ignore the tens of billions of dollars Congress could save by eliminating the taxpayer mortgage interest deduction.


Axing the deduction could save $134 billion in one fell swoop, a congressional committee in charge of tax proposals has estimated.


Few use it

At the tax code stands now, homeowners can deduct up to $1 million of mortgage interest paid and up to $100,000 in home equity debt, says MSN Money tax expert Jeff Schnepper, the author of "How to Pay Zero Taxes 2012: Your Guide to Every Tax Break the IRS Allows." If you own a vacation home, the same applies.


But few of us use the deduction. Only about 23% of taxpayers who filed used it in 2010, for example, says, published by the nonprofit Libertarian Reason Foundation. That's because you've got to itemize to claim the deduction and relatively few taxpayers do.


"The numbers work only for taxpayers whose total deductions -- for mortgage interest, charitable giving and other expenses -- are worth more than the standard deduction," writes USA Today. Only 30% of taxpayers itemize, according to the Tax Policy Center.


The deduction's use varies by geography, USA Today says, "ranging from a high of 37% of taxpayers in Maryland to a low of 15% in North Dakota and West Virginia." It's used most where housing costs are high.


Who benefits most? "Taxpayers with big mortgages in high tax brackets," says the San Francisco Chronicle. Only 16% of taxpayers in the 10% bracket itemize, while 71% in the 33% and 89% in the 35% tax bracket do, according to the Tax Policy Center.


Wildly popular

Few of us use it but most of us love it. Passionately -- as Los Angeles Times columnist Doyle McManus found recently after he proposed dumping it. "Our mortgage interest deduction doesn't directly support homeownership; instead, it supports mortgage indebtedness, which isn't the same thing at all," wrote McManus.


Uh-oh. Them's fightin' words. Never mind that McManus is far from alone. "In the aftermath of the Great Recession . . . many observers have begun to wonder whether the time has finally come for reform," writes the nonpartisan Tax Policy Center, for example.


LA Times readers were furious. "Angry emails flooded in," McManus wrote  in a follow-up. "Many of the objections were well-reasoned, although one reader just called me a Marxist." Another reader said the deduction "is the only real tax break the middle class gets."

Happy ending?

If the tax break is such a sacred cow, why are changes to the deduction being discussed in Congress? A couple recent events contribute:

  • President Barack Obama's re-election. Obama campaigned on a promise of raising taxes on wealthier Americans. His win is seen by many to be a mandate by voters to do just that.
  • Deficit talks. Congress and the White House may or may not negotiate a way around the severe "sequester" budget cuts due to kick in March 1. But eventually their budget talks should get serious. That puts the tax deduction at least on the table for discussion.

There could nevertheless be a happy ending in all this for fans of the mortgage deduction. Remember the $134 billion that could be saved by eliminating it? Oops. Turns out that number was a bit squishy.


That congressional committee re-ran its numbers. Now it says the mortgage write-off is worth far less than previously estimated.


Real-estate columnist Ken Harney explains: "The nonpartisan Joint Committee on Taxation published revised estimates indicating that because of changes in the economy and tax legislation, the cost of the deduction for fiscal 2013 will be $69.7 billion."


That's a $64.3 billion difference. It means that while the mortgage deduction is still a juicy target, it's only half as juicy as before.


Even if Congress does take up the deduction, it could agree to make trims rather than eliminating it outright. It could cap how much interest a homeowner can deduct, for example, Schnepper says. Or Congress and the White House could declare mortgage interest paid on second homes ineligible.


More on MSN Money:

Feb 21, 2013 9:03PM
How about eliminating the earned income credit for people who paid in no taxes, or very little taxes and are getting refunds of $2K and up just because they have chosen to have a house full of kids, but do nothing to support them?  That would make more sense.
Feb 21, 2013 7:09PM
$69.7B of extra taxes from eliminating the deduction of mortgage interest would only fund the Federal Government for 7 days.  Is that a good trade?  Eliminating a key tax deduction to fund the government for a week?  Tax revenue is not the problem, spending is the problem.  

The Federal Government spends about $9.7B everyday and only collects $6.8B in tax revenue per day.  The goal should be to eliminate $3B of spending per day not trying to squeeze more money out of citizens.  (source US Debt US Federal spending $3.54T / 365 days = $9.69B
Feb 21, 2013 7:14PM

Keep going Congress by eliminating MORTAGE interest you will finally destroy the middle class & all we have strugled for plus kill the housing market. We nned to fire our Government as they are absolutely "USELESS" to any man kind & financial well being of Generations to come, makes one want to VOMIT

Feb 21, 2013 7:20PM
So if only 23% of filers use it then how is it so profitable to axe it.
Sounds like an easy out for congress instead of looking at the taking away the deductions from the wealthiest they figure it's easier to take it away from the little guy (the working men & woman just getting by).

I'm one of the 23% that itemizes & uses this deduction. Every home owner (except for those that are carrying only a small portion of mortgage debt) should be using this deduction. I only make 40k a year & I benefit very well from this deduction.

Feb 21, 2013 6:54PM
If Federal tax payers cannot claim the mortgage interest deduction, I will sell (try) my house.  There also goes local property taxes.  Housing industry will feel this hard and the economy.  The American dream is fading.  Atlas Shrugged.
Feb 21, 2013 7:04PM
To show you how inept the reporters at MSN money are (unless they are purposely trying to mislead, which is it?) the facts in this article are not even close to correct.  The tax code allows a taxpayer to deduct mortgage interest paid on mortgage debt of up to $1 million (about $40,000 on a mortgage loan with a 4% interest rate).  $40,000 in deductions is much, much lower than the $1 million in interest the article says one can deduct.  Also, the mortgage interest paid on equity debt of up to $100,000, not $100,000 in interest on that debt.  And we're supposed to trust these people with telling us how the financial world works?  No thanks
Feb 21, 2013 7:44PM
I will keep saying this over, and over. The general public may have a short memory, but if any politician decides to take this one deduction away. I would say it is political suicide. I don't care how much I like or don't like my elected offical in washington. I would make it a point to do everything in my power for them not to be re-elected, and that would go for every single incumbant in office.
Feb 21, 2013 9:28PM

The middle class gets screwed again.  Why is it that you NEVER hear politicians talk about cutting welfare???? It is sad when people can sit on their asses and do better than the working men and women who take care of them!!!!!


Feb 21, 2013 7:24PM
23% seems low, but they say "23% of taxpayers who filed", not 23% of homeowners.  Taxpayers include high school and college students, those that live in apartments, parents that live with grown children, etc.  I'd be interested to see what percentage of homeowners use it.  I know I do- just itemizing that and my state income tax is above the standard deduction!
Feb 21, 2013 7:47PM
My family and every family  we know use the tax break for mortgage deduction. This guy is a looter for the government.
Feb 21, 2013 8:35PM
The government keeps mauling the hand that feeds them.   They forget the producers are not the problem.   They actually need to create an incentive for takers to become producers. 
Feb 21, 2013 7:03PM
Good news! At some point the dems "will" run out of other peoples money.
Feb 21, 2013 6:57PM

First of all, referring to any "budget deficit" is a non sequitur since ther has been no budget in over four years. Second, this is in no way a spending cut or increase in revenue; this is another accounting trick designed to convince the public that a governmental action has meaning or is, in some way, effective. Third, this amount is trivial when speaking of spending in trillions of dollars.


This is just another smoke screen designed to hide the ineffectiveness of the current administration to fulfill its promises. The only way our country can survive is to stop spending money we don't have, cut the level of spending in all areas (not just reduce the rate of increase!), and demand that the Treasury cease and desist from printing more scrip, since this reduces the value of the dollars currently in use. We also need to demand that the Senate comply with their legal responsibility to enact a budget every year.


The mortgage-interest tax-break...  It's not a "sacred cow" used only by the "privileged few".  It's not some kind of sneaky loop-hole where folks weasel around and use some hidden "letter of the law" interpretation to see if they can get over.  It's a simple itemized deduction - much simpler, actually, than if you had a lot of medical bills and itemized to deduct those.  It's actually one of the few real ways to cut off some of your income-tax burden if you are a working-class or "middle-class" home-owner.  Folks who typically do NOT have access to all those rather more-clever and harder-to-access loop-holes and writie-offs and such - "investment costs", "capitol gains and losses", "amortiziation", etc. etc. etc., which richer folks and those who pay accountants use to... hmmm.  ESCAPE paying some tax.   


And it works - if you pay enough mortgage interest in a year to make the total itemized deductions on the fed 1040 greater than your standard deduction.  Extremely straight-forward - you take a mortgage loan, you repay it over time, you pay a sliding (decreasing over time) percentage of each payment in loan interest to the banker / lender.  So, earlier in your loan life - first several years, you pay a high - maybe very high - percentage of each monthly payment as interest.  Later, your payments increasingly consist of your principal that you borrowed, and less of interest.   


I take it.  For a couple more years - until either this is taken away - in place of Congress addressing SPENDING as versus digging around to see where they can grab more money to spend - or until the amount of interest paid dwindles to the point it no longer pays to take this deduction.


Folks can deduct for education and child-care and donations and .... all rather straight-forward as well and hardly sneaky and prone-to-abuse, unlike those harder-to-access "rich-man's games - oops. I meant to say "legit deductions".  Really!  My  BAD).  And WHY NOT?  We PAY that interest to someone else, who counts it as THEIR profit = income (of course after THEY get to write off various "costs" around it) - WE home-owners don't get to use it. Save it. Invest it.  Etc.  Hey.  We DO get to itemize those medical costs...  which of course we also did not get to use for anything else.   Guess folks see "justness" and "fairness" in that - but not in this "sacred cow?". 


It IS a way of encouraging folks to BUY homes.  Otherwise, the COST of home purchase just goes UP - without any benefit to the SELLER or to the AGENT who has a job mediating the sale -  and fewer folks get to buy one.  (Saving several G off your adjusted taxable income saves some money you could have used elsewhere in your economy, and actually reduces the COST of the home over the loan period)  Does the housing market really need this? 


WHY does Congress eyeball this one?  Because "only" 23% of tax-filers take this one, and there is a lot - apparently about 130+ BILLION - of money Congress can grab to SPEND, instead of rolling up their sleaves and doing the harder, but MUCH MORE VALUABLE decision-making to actually CUT government expenditure. Of course, once they can take this common working-man's itemized deduction away... say!  Deduction for high medical costs? High costs of education?  Losses due to accident and theft and disaster?  Why not?  LOTS of money to be had there, as well.   The workers don't need all that cash. 

Feb 21, 2013 8:05PM
Screw with this mortgage tax deduction and I will renounce my US citizenship.  The tax crazy socialist bastards in Washington have done so much to undermine America.  This would be the final straw.
Feb 21, 2013 8:33PM
These SOB's better not even think of it!
Feb 21, 2013 7:15PM
The article doesnt even mention that there are already limits on itemized deductions if you're married and had an adjusted gross income is over $143,000. This is not something the  Ultra rich get much benefit from.
Feb 21, 2013 7:41PM

The American dream is fading i think it is gone.the price of cars to tv cable is

just just living until i die cheap as i can !!!!!!!!!

Feb 21, 2013 7:05PM

Wealth redistribution...this is how you do it!


Feb 21, 2013 7:11PM
Of course, only affects Federal income tax payers.   Didn't need to upgrade my housing and put money into the economy anyway.   See a trend here?
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