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Kill the mortgage tax deduction?

Some people argue the break distorts the housing market and unfairly helps buyers who can afford more expensive homes.

By MSN Money Partner Sep 12, 2012 2:04PM

This post comes from Jim Wang at partner blog Bargaineering.

 

Image: Taxes (© Thinkstock/SuperStock)I promised you that we'd discuss Planet Money's "6 policies economists love (and politicians hate)." Let's talk about the first one: eliminating the mortgage tax deduction.

 

Here's how Planet Money presents the idea, part of "the common-sense, no-nonsense Planet Money economic plan -- backed by economists of all stripes, but probably toxic to any candidate that might endorse it":

Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

I agree and here are my three reasons why.


Post continues below.

First, the mortgage deduction is not as widely beneficial as most people believe it to be. Remember that those who don't itemize deductions get a standard deduction -- $5,950 for a single filer and $11,900 for married filing jointly for 2012 -- that we are able to claim without paying a penny. So if your total itemized deductions, including your mortgage interest, total  $5,950 or less as a single filer, you get no benefit from the mortgage interest deduction.

 

Second, how many people consider the deduction when buying a home? You probably look at your income and try to qualify for a loan. How many buyers adjust their withholding after they buy a house because they know they will claim the deduction? Very few, I suspect.

 

It's not part of the buying decision. Rather, the deduction results in a tax break, disbursed as a tax refund the following year. That money is then doled out to whatever the recipient's existing needs or wants are.

Third, the deduction is a government subsidy that increases home prices. Just as the Fed's quantitative easing and loose monetary policy have resulted in lower interest rates -- which increases home prices -- the mortgage deduction is fiscal policy that boosts home prices and rents.

 

What do you think? Time to scrap the deduction?

 

More from Bargaineering and MSN Money

959Comments
Sep 13, 2012 2:03PM
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No need to explore Mars you writers must be from there. Just another attack on the middle class so the rich can get their tax cuts.
Sep 13, 2012 2:03PM
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Just another example of the Government distorting the free market.  Ditch it and encourage people to view housing the same way they would view any other purchase.  It would also eliminate the false belief that buying a home is an investment which it is not.
Sep 13, 2012 2:01PM
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I doubt that very few people DON'T adjust their withholding after buying a house. I know I did and in fact my realtor stressed that the interest would reduce my taxable income. People who don't adjust their withholding only do it because they can't save money and count on a big refund for vacation or to pay off credit card debt from things like Christmas. IF this deduction is eliminated without reducing the overall tax rate to say something like what Romney pays ( about 14%), many more people will be unable to afford to continue to pay their mortgage and will walk away adding to the current mess we already have in the housing market! Since I am $30,000 under water and eliminating that deduction without lowering the tax rate would increase my taxable income about $16,000, I would probably be one of them.
Sep 13, 2012 2:01PM
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Better yet, cut in half the salary and benefits that bunch of crooks on capitol hill get and make them public servants again. That's where the cutting needs to start.
Sep 13, 2012 2:00PM
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Instead of scrapping all mortgage interest deductions, why not eliminate the mortgage interest deduction that is allowed for second homes, yachts, motor homes, etc.  If you can afford a second home, the government probably doesn't need to subsidize this. 

 

Also, eliminate home equity lines of credit unless made to improve the first residence.  Again, many people take these out to purchase cars, pay off credit card debt, etc and why is the government subsidizing this behavior.

 

Keep the mortgage interest deduction on your primary residence.

Sep 13, 2012 1:59PM
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I pay nearly $12,000 on mortgage interest alone, and on my rental house I pay mortgage interest. No, I hardly don't think it is time to scrap the deduction. It is bad enough to have to rent your rent because you can't sell, let alone the expense of fixing what the tenant breaks all the time. Half my pay goes toward interest on my house, and just because the sale of my first house fell through, left me with such a high interest rate. I certainly would be bankrupcy court if that were to happen, because my student loans are considered of what I report on my 1040, I only gross $32,000, and I support four people. Can you see the big picture now? My adjusted gross income would show more than I have to spend! Where did you get your degree?

Sep 13, 2012 1:58PM
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STUPID IDEA...WRONG ASSUMPTIONS. Tax deduction for interest is helping middle class working hard to have some break. It promotes house bying. If i will not have a deduction for interest i pay, i will not own a house. Period. I woudl just rent. Why bother with downpayment

if it menas nothing. Rich people dont care one way or another. Thye pay cahs for house and dont pay interest. This sure sounds like a republican idea to nail middle class with huse taxes

Sep 13, 2012 1:58PM
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Two points in response to this author's article:

1) Reduce home prices: This sounds great if you don't own a home but about 62% of Americans own homes (down from ~75% in 2005) and reducing home prices effectively reduces American family wealth, which is already happening due to our current economic malaise. SO - why would anyone take on a policy that would further reduce Americans' wealth they have created for themselves?

2) Standard Deduction vs Itemize: The standard deduction provides a floor for people, so if their deductions are lower than the standard, they receive the benefit of using the higher standard deduction (rather than having to itemize and receiving a lower deduction), a tax benefit. For those people who have higher deductions than the standard, they can itemize, which provides a tax benefit. SO - Removing the mortgage tax deduction would harm those who can use the deduction and not help anyone that already takes the standard deduction. Does that make sense?

These two points only show one thing: the author of this article has no idea what they are talking about. That is clear.
Sep 13, 2012 1:55PM
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These guys must be smoking funny weed. Everyone has to know that the mortgage deduction is one if not the biggest reasons to buy a home. You will stop renting when you realize the only way to get ahead and keep more of what you earn is buy OWNING  not   RENTING.  When you rent you are paying the other guys mortgage and he is writing it off.
Sep 13, 2012 1:54PM
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You shouldn't be buying a house where you have to count on this deduction as part of a reduction in the price.  You bought more than you could afford or more than you needed.

 

And in another post, as for the President's use of AirForceOne....go look at how much Bush used it before you complain!

 

And don't forget....this is something Romney wants to do...close loop holes!

Sep 13, 2012 1:54PM
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The mortgage deduction has never been a factor in my tax bill. I don't have enough other deductions to make it worthwhile to figure this in, the standard deduction always comes out higher, the same with the medical deduction and most other of the deductions available. May as well do away with them and go with a straight flat tax.

 

Sep 13, 2012 1:52PM
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I am completely flabbergasted by this article.  We are struggling as middle class citizens and for this writer to suggest killing the mortgage deduction makes no sense.
Sep 13, 2012 1:52PM
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I'd like the author to explain exactly how the mortgage tax deduction currently drives up home prices, and the economic theory behind how getting rid of the deduction would drive prices back down. I'm not an expert by any means so I'm genuinely curious as to how this works.
Sep 13, 2012 1:48PM
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Take away the mortgage deduction and I'll just walk away from my underwater house.  No sense paying all that money for nothing.  The people that will hurt the most is the MIDDLE CLASS AGAIN!!!!  I'm sick of being screwed for being responsible and scratching and clawing to keep from drowning in this bad economy.  I'll just contribute to the housing crash some more.
Sep 13, 2012 1:48PM
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The majority of the working poor do not own homes anymore. They and there unmarried partner rent. The people who own homes are married to the opposite sex, have jobs that pay better than the typical renter and deserve a tax break. They pay school taxes on there prpoperty  is some states that the renters do not and they pay for the illigetimate children of the renters to attend thos schools. What would be the incentive to owning a home and paying interest instead of renting if you could not deduct the interest? The transient society that lives paycheck to paycheck and pays monthly or even weekly to rent a place to hang out and have children out of wedlock would love to see the successful, employed, married people get punished for playing by the rules. Owning your own home and working toward leaving your legal children something is still part of the working America fabric. The cry babies and renters who work only enough to buy beer and smokes while sleeping wherever and with whoever they want do not deserve the same tax break.
Sep 13, 2012 1:48PM
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YOu are DUMB!!! the single deduction is $495 a month....since the average mortgage is over $750 that would mean in order for someoen to NOT benefit their house would have to be over 50% paid off to NOT have about $500 of the payment be interest...and snce Obama has been forcing refinance on everyone they are probably refinanced now OR before the crash and all the equaity has been lost or taken out thus menaing since mortgages are FRONT LOADED wiht interest...most if not almost ALL mortages are repaying that interest thus substatiating the idea that $500 bucks is not much interest to attain per month.

 

Your an idiot

Sep 13, 2012 1:47PM
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I would give up all my tax deductions if they initiated a straight 10% tax across the board for EVERYONE!! No slack , no fuss, everyone pays no deductions for ANYONE, corporate or private no matter. Make a buck pay 10 Cents make amillion pay 100k$$ simple clean and neat. This would " stimulate" the economy too I think. If people knew their tax for the year was already set they could plan for their wants and needs more readily ,no? I think so. Granted, it will seem like the rich will pay less but they make more so it follows thru. The poor man pays 10%, the rich man pays 10%, what matters is that they PAID...NO EXCEPTIONS.........jMO
Sep 13, 2012 1:46PM
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Time to scrap all deductions and invoke a "flat tax" where everybody, individual, small business & corporation pay 8% of their gross income period. It would render many more dollars to the tax coffers and eliminate that pesky April thing to those who have taxes with held.
Sep 13, 2012 1:45PM
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To your points:
First, itemizing saves me more than the standard deduction every year and the mortgage interest deduction is a huge part of that.
Second, the tax deduction on mortgage interest was a MAJOR reason we purchased our home. I was getting killed at tax time while I rented.
Third, if this is true (or should we just blindly believe it since it is on the internet) then how about the folks who already own a home? I don't know how plugged in you are to the current market, but we're getting killed out here... and you want to make that worse?

You are an idiot.
Sep 13, 2012 1:45PM
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Let's step back and look again. We the tax payers provide the operating budget / revenues for the federal government. Clint Eastwood nailed it during the RNC; "politicians are employees" we hire these people to do a job for us. There job perfromance is reviewed every 2-4 years (election cycles), when they're not doing the job we have to "let them go!" They ask for more money, we say no they pass a law so that we have no options. These employees are sticking it to us so, we have to let them go! Hire / elect people that can manage a budget / revenues. Next we need to send out a letter to the world: "Effective immediately all foreign aid ($) payments are suspended until further notice. Our middle class can no longer support our federal governments addication for money." There you go Washington, we just saved ourselves BILLIONS $$$$$! MID is off the table!
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