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Shrink the mortgage interest tax deduction?

The suggestion of trimming this popular tax break has people seething. But, really, few of us -- very few of us -- get anything from it.

By Karen Datko Oct 26, 2010 9:46AM

This post comes from Marilyn Lewis of MSN Money.


The Wall Street Journal reports that the mortgage interest tax deduction may be an endangered species, at least in its present form. From the reaction, you'd think they were proposing slaying all first-born children.

The bipartisan White House deficit commission (aka the National Commission on Fiscal Responsibility and Reform) hands over its report Dec. 1. The Journal says it's considering suggesting trims to the popular mortgage tax break.


"The White House has said these and other breaks cost the government about $1 trillion a year," the Journal says. That's including "child tax credits and the ability of employees to pay their portion of their health insurance tab with pretax dollars."


The panel apparently isn't suggesting killing these tax breaks, just shrinking them.


Also: This is not a done deal. Not even a proposal. It's a rumor. The panel still could take the deduction off the table. Post continues after video.

But the panel's job is to find (bipartisan) ways to reduce the federal budget deficit. We'd need to cut $240 billion (yearly) to balance the budget by 2015 (not including interest on debt), the Journal says. So, clearly, some things must go.


The panel, apparently, is trying to pick off the less-sensitive issues first.

Still, officials have found there aren't any easy ways to balance the budget, and they are expected to steer clear of more polarizing issues like Medicare, Medicaid, Social Security and a broad rewrite of the tax code in their short-term recommendations. The panel could still make long-term recommendations to change these issues, but they would be less concrete.

Sensitive? Yikes

But the mortgage interest deduction is sensitive enough. It costs $131 billion annually, says the Tax Policy Center. That dwarfs the cost of the Afghanistan war ($105 billion in the 2010 fiscal year) and is nearly three times what we spend ($48 billion) on all U.S. Department of Housing and Urban Development programs.


Even the rumor of carving up this sacred cow has Journal readers whipped into a fury.  A very political fury. Here's a teeny sample:


Reader "David Neal" wrote:

That will be another nail in the economic coffin we call America. I wrote off 7000 on interest last year. That will hurt real bad come April of next year. Obama is an idiot. I honestly am beginning to believe he was put here to destroy America. Everything he does or says is counterproductive to what we need.

"Mike Jones" replied:

And somebody who didn't take out a large mortgage was forced to pay for your share of taxes. Did you enjoy the wealth transfer?

Reader "jimmy larsen" added:

What a bunch of schmucks. We already have a National Commission on Fiscal Responsibility and Reform. It's called Congress.

Like many Journal readers, "KEN SANDERS" questioned the administration's priorities:

… Instead, how about cutting the gold-plated pensions and health benefits for the elite at all levels of government? God forbid we allow ignorant taxpayers to earn a return on their Social Security contributions, while the government elite does so every day on retirement benefits to which they contribute nothing ... The double standard and condescension of our government continues to be breathtaking ....

"Dan Foster" shot back:

Do you want them to cut military pensions and increase the premiums and out of pocket health care expenses for the military? The military is "the government" you know. LOTS of faceless, money devouring bureaucrats are in the military. Look at how expensive those wars in Iraq and Afghanistan were! Some of the people in the military actually have the gall to expect disability payments and free health care from the taxpayers for their war injuries too ... FOR LIFE!!!

This is one popular tax deduction.


Last month, 79% of the "likely voters" polled by the National Association of Home Builders agreed that "the federal government should provide tax incentives to promote homeownership." Support for the subsidy came from supporters of both political parties and independents.


Does shrinking this tax break seem like a good idea to you? Weigh in below, please.


What's in it for you?

But -- and maybe we're asking for a rain of napalm on our heads -- does this sacred cow actually do you any good?


Look at who loses if the mortgage tax break is shrunk. Are you among the 65% of Americans who do not itemize deductions (like mortgage interest, state and local taxes, and gifts to charities) on their IRS 1040 forms? If so, the mortgage interest deduction adds nothing -- zip, zero -- to your bottom line.


By last count (in 2004) just 35% of Americans itemized. The number is growing, though.


Put simply: If you use the standard deduction ($5,700 if you're single or married filing separately, $11,400 on a joint return, or $8,350 if you qualify as head of household), you might want to save your indignation for something that affects you.


Who exactly does it help? Middle- and upper-income households, according to The Dallas Morning News


Here's who gets least and most from it:

  • Least: If you make less than $40,000 a year, you're likely, on average, to gain $91 from the deduction, says Jim Van Meerten at MSN Money. (He is, for the record, anti-deduction reduction).
  • Most: If you make more than $250,000, your MID benefit is an average $5,459.

Most people who benefit from the deduction would own a home even without it, says the Tax Policy Center. So much for the idea that the break encourages homeownership.


"If the government wishes to promote homeownership, a refundable tax credit available to all taxpayers, not just itemizers or those with positive tax liability, would be more effective," the Tax Policy Center adds.

There you have it: Everybody loves the mortgage interest deduction. But the chances we actually get anything from it? Slim.


What do you think? Why not give everybody a housing tax credit? Is it fair to single out homeowners for benefits that all taxpayers subsidize? Does shrinking the deduction make you see red, even if you don't get anything from it?


More from MSN Money:

Oct 26, 2010 12:49PM

If I have to pay taxes on interest earned, I should be able to deduct interest paid from my income.  


The bank pays taxes on the interest I pay them.  It shouldn't be taxed on both ends.


Yes, I take the deduction.

Oct 26, 2010 12:45PM

The mortgage interest tax deduction is one of the few deductions left for the middle class.

    I am a tax preparer. I say eliminate the earned income credit deduction for children that are other than children and grandchildren. There is rampant fraud out there right now costing tax payer millions and millions of dollars. We need to stop the use of nieces and nephews for EIC unless they have been legally placed.

Oct 26, 2010 12:17PM

This deduction does not promote purchasing a home, it promotes getting a mortgage.  That said, getting rid of it now will further clobber the RE market, though many argue that since values can't go much lower anyway now is as good a time as any to do away with the deduction.


Full disclosure - I'm in the 35% of taxpaers that takes this deduction.

Oct 26, 2010 1:02PM

What about all those who will get thrown to the AMT wolves without the mortgage interest deduction?  Without deducting our home interest my husband and I would be in that camp. 


Our tax system is a mess. I honestly feel it would be less controversial to rewrite the entire thing. 

Oct 26, 2010 2:28PM
What about cutting spending. I'm not against eliminating or reducing some tax breaks, but it has to come after we make real cuts in Federal spending. This additional revenue will only cause the government to waste more money on additional entitlements and wealth -spreading. I can't wait to vote them out next week. No incumbent deserves a single vote. On both sides of the aile we have a sorry lot of elected leaders. Its time we the people get off our **** and vote for some leadership in Washington.
Oct 26, 2010 1:21PM
I am one one the 35% that itemize to get the mortgage deduction because I am single with no children.  I get almost nothing back from taxes as it is (less than $1000), and that credit is half my refund.  I would be very upset to lose it.  I think they should be looking at why 60% of the people don't pay any taxes at all and tweak that!
Oct 26, 2010 2:24PM
What about cutting spending?   I would cut all departments every government agency, all entitlements, everything by 20 % no exceptions. 
Oct 26, 2010 1:21PM
if they take the mortgage interest tax break from the American People, watch the mortgage industry crumble...... people will walk away it just won't be worth it..... they better think twice about it....I am a Realtor here and that is just what people are telling me....
Oct 26, 2010 1:13PM

This is like the only tax break I actually get.  Single people get shafted.  When we take away the tax break for kids then lets talk about taking the mortgage tax break away.  Otherwise if this break is taken you may be seeing one more walk away from their house.  It's still dropping in value faster than I can pay it and that mortgage break is at least a small light at the end of the tunnel.

Oct 26, 2010 12:47PM

Well...I'd sooner see the money find its way back to the taxpayers. Let's stop the $ draining wars in Iraq and Afgan. since we all know the that these are sham wars lining the pockets of the corporate world. 

Oct 26, 2010 1:20PM

I agree with Dont coddle. I, like many other middle class americans, would fall into the AMT if the government does not fix it from year to year. If they decide not to fix it and then, on top of that, not allow the mortgage interest deduction, my tax bill would increase 35%. For those that did want to buy a house, that's not my problem. You plan smart. This house is also investment for my kids (future equity). I do not keep any other debt but this. I should not suffer the tax bite for people who decide not to get married, shack up togther, have 4 to 5 kids in an apartment (paid for with the help of government assistance) and sit home watching a 46 inch flat screen television while I work 8 to 10 hours a day, travel to and from work and then watch tv on a 32 inch tubed television. For the people who plan smart they should not be punished. If we all sat around and popped out kids to collect free benefits then there would be a $2 trillion deficit.


For the record, I have no problem paying a larger share (one time adjustment to the tax code), but I would not expect the Government to come back at that point and then ask for more (ie: MTA of New York).

Oct 26, 2010 2:12PM

Go ahead and take my deduction, that will be a few thousand less dollars for me to spend in this economy... Then with less consumer spending, will come lower revenue, which will then raise taxes, which will then give me less to spend and that will lower revenue, which will raise taxes which wil lower revenue....


Spin cycle.....

Oct 26, 2010 12:59PM

I think the deduction is - one again - a break for the upper class.  I know wealthy people who purposely do not pay off their homes (even though they could) so they can use the deduction.  Canada does not have the deduction and home ownership is about the same as here in the states. 

As far as dcg_NH says about paying taxes on interest earned - why not deduct car interest then?  How about the interest you pay on your credit card?  Obviously money gets taxed over and over -  I am taxed on my earnings and then when I pay someone for services with that money, they are taxed again on their earnings.  That is how it works, unless you are Exxon-Mobile, then you don't really pay much in taxes. 

Everyone wants to lower the deficit and as weiwentg said, it is time to chip in.  Face it - to do the job we will have to suffer both a limit in government spending (cuts in military industrial spending will be the only thing that can really help on that end) AND we will have to pay more in taxes one way or another.

Oct 26, 2010 1:45PM
I am a Certified Financial Planner and a former mortgage banker. I also itemize and so I do gain some benefit from the deduction. I have contended for most of my 26-year career that the mortagage interest deduction  is of very limited value to most people and is a poor method of encouraging home ownership. I agree that most people who truly benefit from the tax break would buy homes regardless. Realtors and builders use the tax deduction as a major selling point to entice buyers but rarely compute the actual net savings for the buyer. Even people who itemize only benefit to the extent that the interest deduction increases total itemized deductions ABOVE the standard deduction that they would get anyway. Non-itemizers get no tax benefit whatever!
Oct 26, 2010 4:20PM
I don't give a flip about the MID, I'm 51, my mortgage is almost paid off and I haven't itemized deductions now for 3 years running. The next home I purchase will not be here, as I plan to retire outside the country so I can make the most of my retirement funds and watch the United States implode from a safe distance.

The US is one of the few developed economies that heavily subsidizes home ownership through tax incentives, and look where it's gotten us? It's a false economy to believe there's benefit to spending a Dollar on mortgage interest to get back 22 to 25 cents (marginal rate) on your taxes. Pay off your mortgage early and then plow that house payment into savings and investments so you don't have to work until you drop dead.

Oct 26, 2010 2:38PM

Another redistribution of wealth in this Socialist Regime.

Oct 26, 2010 1:24PM

I take a mortgage interest tax break each year and I'm a government employee with a decent salary. I could see a limit being placed on the amount you claim, possibly using the average price of a home nationwide and then only allowing the same value of mortgage interst to be deducted.


I'm willing to pay a little more, but what i'm really tired of hearing are all the snivlers who goofed off the first half of their life and planned on Social Security to be their only retirement. Now that the economy is down, they want me to support them for their years of poor planning.


As a government employee, I started out with a salary lower than private industry, but some of the benefits were better. I knew I would never get rich and would have to work 35 years at the same job. Now that the economy is bad, I'm the cause......please....quit whining, quit spending your money on drugs and alcohol and try saving a little. Maybe even enough to buy a house. 

Oct 26, 2010 1:42PM

People here are throwing around the 60% number as to how many Americans do not pay income tax.  Depending on who is reporting that is about right.  Let's remember though - most of the increase since the mid-1990s in the number of people who owe no income taxes is the result of the child tax credit.  This policy was created by Congressional Republicans and expanded with Republicans in the lead.  To often people think that tax breaks like this one are liberal-led, but they should realize that it is the GOP who feels we should run this country with no tax money coming in.

This has increased the amount of money you can make and not pay income taxes dramatically in the last 20 years. 

I have two children and have a very modest income, but I do agree that this tax credit is a problem, perhaps more so than the mortgage credit. 

However, to those of you who are single and have no kids and are complaining - Enjoy your sleep, your freedom to do as you wish, and - yes - your money while you can.  Getting a tax break is nothing compared to what a child costs you in the three things listed above.  That being said, I wouldn't trade being a father for all the money in the world :) 

Oct 26, 2010 9:19PM

These politicians are such pigs. Has anyone in favor of eliminating the mortgage interest tax deduction even acknowledged the property taxes homeowners pay? Why are homeowners subject to a huge yearly bill while other, greater forms of wealth go untaxed?


My interest deduction is more than offset by my property taxes right now. Hence, I do no see this as a subsidy, but rather a shifting of my tax burden from the feds to the state and local government.


Also, a subsidy involves taking money from the government, not keeping the money you earned. The language of these pro-tax people is astounding (really, really, shameful). Do they really think we're that stupid?

Oct 26, 2010 4:12PM
Let's go, guys. Everyone is going to have to give a little to get this thing fixed. Yeah, the politicians are atrocious - but we, the voters are responsible due to our apathy. Sure, cut the mortgage interest deduction, tax credits, etc. and even increase some taxes. But you better damn well go dollar-for-dollar with the spending cuts. Yes, do away with the special pesion for government employees (but yes, carve out something for the armed forces) and make them all contribute to social security, do not pay $1 million a year to keep offices open for retired congressmen (Hastert), do not include ridiculous 'you scratch my back' in bills ($**** thousand for bows and arrows for Native American schoolchildren in New Mexico as part of the Health Care Reform Bill), ridiculous extensions of unemployment benefits. Yes, it is gonna hurt. Nobody wants that but in order to fix it we will have to take it on the chin. We asked for this - well, now its time to pony up.
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