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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 5:27PM
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I THINK YOU ARE BOTH OUT OF YOUR MINDS. GET OUT OF THE FINANCIAL BUSINESS!

Sep 13, 2012 5:27PM
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Uh, so if you have the deduction and you did actually adjust your deductions accordingly (as I have), that would mean a large increase in my taxes. If you increase my taxes, it will cost you anyway as I will have more coming out of my bi-weekly deduction and less to spend in the economy. Yes, there are some of us smart enough to realize that we could up our deductions because we were going to get more in every paycheck. But that helps the economy in general. And what are you going to do with the thousands (millions) of homes that suddenly get dumped on the market because now those same homeowners can no longer afford their homes and need to downsize? There would also not be any advantage to owning a house. None. Zip. So will ALL property revert to the 1% as this becomes some type of feudal 3rd world country? Is that in the best interest of society and this country?

I love these ideas that aren't well thought out.
Sep 13, 2012 5:27PM
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Used to be we could decduct ALL loan interest dollars but that ended in the seventies, the talk then was of failed car dealers and loss of sales in furnishings etc. Did slow for awhile then the next generation that never had the deduct came to play and it slowly ebbed a little back but it never reached the levels of credit and bank incomes of the sixties/seventies.  Want to cripple a little more of the economy, it won't be a permanent result but it will still hurt if those that can make the deduction have it no longer.  We are speaking of those that have enough money to buy and support tax bases, they slow spending and the taxes must be made up elsewhere just as in the tobacco sales ebbs debacle we currently see, the windfall there was to pay for medical expenses but as taxes raise spending drops and the two balance at the same point still

.

Sep 13, 2012 5:27PM
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One more idea from those who don't have a clue.  One more idea to hurt the middle- class  people. One more idea that needs to go down the toilet as quickly as possible.  Why is it these so called  prognosticators always advise things that benefit the rich and powerful?  In the 2012 election the middle class doesn't stand a chance.  It is the lesser of two evils. However, Obama may be having to spend more time appeasing his muslims than looking at the election.  WE ARE IN SAD SHAPE!!!!
Sep 13, 2012 5:26PM
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You must be delirious.  If that deduction was eliminated the economy would crash, and current homeowners would never be able to sell their home.  While some (not most) do not consider the tax effects up front, they certainly see them when they prepare their taxes.  If you take it away most people would owe money at tax time, instead of the average homeowner receiving more than $2,500 average.  Unless the goal is to have the government get a huge tax increase from the middle class, and play Robin Hood and give it to themselves for their reckless spending, and then give some crumbs to the the poor than it is a BAD idea.  What is a better idea is to put limits on income and the amount of indebtedness that qualifies, so you are not disproportionately favoring the wealthy.
Sep 13, 2012 5:26PM
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There already is a limitation in place on the amount you can deduct so the argument that the deduction is overly beneficial to the wealthy doesn't hold much water.  This write off is something that makes home ownership more affordable for the middle class, who seem to be struggling enough already to stay in their homes.  Take it away only if you want to watch the real estate market implode.
Sep 13, 2012 5:25PM
Sep 13, 2012 5:24PM
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Using basic math, this will never happen.  For any home over $100,000 the owners take the deduction.  The effective cost of your mortgage goes down by your interest rate - your tax rate.  So without this, your mortgage would effectively go up 20-30% for most middle class Americans.  Therefore prices would suffer equally, in the middle of a horrible time for housing.  I just won't happen.

 

To be honest, charitable giving is a better target.  The benefit of giving is for the same people (who itemize deductions).  Your effective cost to give is less the higher tax bracket you are in (say you give $100 and you are in the 25% bracket...it cost you $75 to give rather than the person in the 35% bracket who paid $65).  So - assuming we have to all pay the same amount of taxes collectively - that pushes the tax burden down to people in lower tax brackets *shrug*

Sep 13, 2012 5:23PM
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I think this is ridiculous! It would increase my taxes by $1000 and I'd bet I am about average.


Sep 13, 2012 5:23PM
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After reading these posts, I have come to realize that not many tax payers respond to the forum. Look We are already taxed too much. Why don't we try and find out how to keep from spending our tax dollars on crap that isn't necessary. Let's see that would pretty much put 85 percent of government employees out of work. But we would have a huge surplus. As far as you nuts think that taxing the rich more would solve things, get out a calculator and do the math. Wait a minute most of you complainers don't have a clue of how to do math
Sep 13, 2012 5:22PM
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Get rid of the deduction on 2nd home and income property for sure!

Sep 13, 2012 5:21PM
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this is SUCH a 1%er mentality - those people who are independently wealthy that can afford to buy a house with cash in the first place.  what incentives are there to the other 99% of the population to buy a home if this is rescinded, other than resale value of the property?  why would ANYONE agree to a 30 year mortgage to buy, say, a $200,000 house that ultimately ends up costing them $600,000 because of interest on that mortgage?  no one would buy a house - it would be MUCH cheaper in the long run just to rent an apartment.  talk about Ivory Tower thinking.

Sep 13, 2012 5:20PM
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anyone that wants to kill the mortgage interest tax credit should use the bullet to kill themselves

 

just another idiotic republican idea.

Sep 13, 2012 5:20PM
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Remove it for anything other than a person's primary residence.  People like Bloomberg can claim the deduction for their four - count-um - four, five, six, etcetera ad nauseum, homes.  No need for anything other than their home. 
Sep 13, 2012 5:19PM
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FROM A BLACK CONSERVATIVE:  To suggest elimination of this deduction is further evidence of the rapid deterioration (and ultimate destruction) of our society as we know it.  
Sep 13, 2012 5:19PM
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Jim Wang,

     Where is the data to support , "big houses get bigger tax breaks, driving up prices for everyone."? 

 

 Eliminating this tax break will send the economy into a tailspin.  Don't you think that the more money spent paying mortgages, etc. means the less money to buy goods and one of the reasons the economy is taking longer to recover while the banks recovered just fine after the bailout? The banks are dragging the heels in helping homeowners while accepting cash offers for the homes (once foreclosed) of 50% of the mortgage.  Isn't this why if the mortgages were refinanced faster in these fed programs, people would have more discretionary income which would lead to higher consumer confidence and therefore more spending which would drive up demand for goods, jobs, etc. you know the cycle that drives the economy?  I know this is simplified but what is your train of thought as well as the economists?

Sep 13, 2012 5:19PM
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No I think they should leave it be.
Sep 13, 2012 5:19PM
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 HEY YOU DIDT MENTION THE AMT TAX   IN STATES WITH HIGH INCOME TAX LIKE NJ AND NY   THE MORTAGE DEDUCTION DOSENT  HELP  GET RIDE OF THE AMT TAX THEN THE  INTEREST DEDUCTION HELPS
Sep 13, 2012 5:16PM
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The author probably rents...

This is an idea that will never fly, just keep reading the comments before...it's political suicide for anyone even talking about it.  It flys against the fabric of the 'American Dream', whether that is something real or not, it's still a dream to many.  I've purchased six primary residences in my life, and each and every time I absolutely considered the tax consequences in my purchase decision.

Sep 13, 2012 5:16PM
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Obviously, those who own a home understand the benefit of the mortgage interest deduction and those that are opposed to the idea probably don't own their own home.  It's a battle of the haves and have nots.  Benefit of success versus failure of complacency.

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