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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 27, 2013 8:55AM

There are only so many ways to "soak the rich."  Eventually, those in favor of more revenue, which is code for tax increases, will have to start taxing the Middle Class more.  Everyone will feel it.  This shouldn't come as a surprise to anyone. 

Cuts need to happen first.  Look at how the entire government is screaming about the Sequester, both Dems and Reps.  About how bad the cuts will be, etc...  I realize they aren't the best planned cuts, but get over it.  It isn't even a cut, but a reduction in spending increases.  If the government and the citizens cannot handle what amounts to a 2% spending decrease, then I fear we have gone beyond the point of no return.

Feb 23, 2013 1:41PM
Congress should look in to Limiting mortgage interest deduction up to first  $350,000. home loan interest . This  will not hurt housing  market, this can bring extra fifty billion to lower the deficit . those upper class home owners will still get tax brake on mortgage interest up to first $350,000 home loan interest  payment. they will loose deduction on any thing above that ,
If sum one owns home  loan of  $500,000 . they will loose deduction on the balance of $150,000. loan interest deduction.
this will still help our housing market. Just do the math.
We need to look in to every loop holes, deduction , to bring the deficit  down , without hurting middle class and our economy.
Feb 22, 2013 9:40PM

I have used this particular deduction religiously ever since I purchased my first home in 1971 after being discharged from the Navy.   The existence of that deduction and the availability of a low interest VA loan were, in fact, principle selling points that helped me decide to take the leap and actually commit for 30 years.  


If the vast majority of tax payers are too lazy or too uninformed to itemize and claim it that is their problem but it would hurt me terribly to lose this deduction.  The only way that I would support its elimination is if it is replaced by a major tax credit for homeowners whose principle residence is valued at  $250,000.00 or less rather like the standard deduction for a dependent.


Itemizing is indeed a royal pain but if I had not itemized for the last 43 years I would have paid something like $35,000.00 to $40,000.00 in extra taxes.  It typically saves me eight hundred to one thousand dollars every year.  The elimination of credit card debt as a deduction a few years ago was tough to take but I agreed with it because personal credit was becoming far too easy to get and abuse.  That slowed it a bit.  At a time when we are trying to stimulate the home market it seems to me to be counterproductive to do something that would further hamper that effort and make home ownership less attractive to first time buyers like I was 43 years ago.  Stupid if you ask me. 

Feb 22, 2013 9:15PM

I guess the average republican would rather lose their home mortgage tax break instead of the ultra wealthy losing their

 "jet , yacht and capital gains" tax breaks.  Go figure.     With my salary of $52K, I had almost $22K in deductions.  I learned a lot from ole. Mitt...I'd sure hate to lose all my deductions...I'm sure Ole' Mitt would too.

Feb 22, 2013 9:09PM
Just remember, the liberals in charge truly believe that the money we earn from our hard work and sweat is theirs first!  They believe that we should just hand over our paychecks and they will decide what we are allowed to keep!
Feb 22, 2013 8:52PM
If it were law that a first year Congressman/woman would be paid only minimum wage (about 15,000 yearly), how many would run for office???  If it were made law that an opinion poll would be used to calculate the second years salary for a congressperson, how many would run for office???  If it were made law Congress would have the opportunity to buy their own heathcare insurance as any other person, how many would run for office???? If it were made law that Congress would participate in Social Security as most Americans do, how many would run for office??  Money corrupts people!  If we want honest leadership, we have to demand Congress works 40 hours a week and 240 days a year for close to minumum wage.  That will get only those who really want to SERVE!  One can't make this happen.  300 million can!!!
Feb 22, 2013 8:42PM

This is all a big farce.  They are gonna holler about "no money" and "need more taxes" and "gonna shut the guvymint" down until they get more money from taxpayers.  The government is not going to shut down. I wish it would. but it isn't.  They will do anothe "last minute" deal. Another "eleventh hour" scenario.  They will bail out again. They alwasy do.  It is just another "fiscal cliff" movie, this time the 2013 version.  The best way to save money would be to shut the government down.  Lock the doors and turn out the lights.  Go home! Nothing is done in DC anyway.  If that would happen, there might be more interest in paying congressmen/women minimum wages to get the money and benefits grabbers out of office and introduce MERIT pay for those left there.  Shut 'em down Mar 1...


Feb 22, 2013 8:26PM
Once again the people who work for a living and struggle day to day are being gang raped by the liberals in D.C.!  I guess we are not smart enough to have the "govment" give us free housing, free food stamps, free medical care, and even free phones!  The problem with all of this "free stuff" is that SOMEBODY has to pay for it and now the idiots in the House, Senate and White House are finding a new "1%er" type group to screw!  Just wait all of you welfare royalty, you will get yours in the end!
Feb 22, 2013 8:10PM

I want congresses pension and welfare on the table!!!! enuff said

Feb 22, 2013 8:05PM

Eliminate ALL deductions, credits, etc. and lower taxes for everyone!



Feb 22, 2013 6:43PM

better yet, cut out all foreign aid EXCEPT for food ect ,,,lets see how much we have then



Feb 22, 2013 6:42PM
why dont they just go ahead and cut our fn heads off,,,that will be a lot quicker
Feb 22, 2013 6:04PM
cause and effect but. they don't think about this. value of homes owned will plummet once again causing a new flurry of foreclosures, reductions in values, lower assessments and property taxes for the localities. ignorant and stupid SOB's
Feb 22, 2013 5:56PM
Putting a reasonable cap on deductions for mortgage interest and real estate taxes is quite sensible even though it may upset Obama's celebrity friends and golf partners. The elimination of most tax deductions, tax credits, and exemptions would also be appropriate. Taxes on welfare and food stamps would also be wise. We really need to get people to start paying their "fair share" (whatever that is).
Feb 22, 2013 5:51PM

The problem folks, is that the people in government are so wildly out of touch with middle-lower class that they cannot comprehend how most of us live. They still think a wage of $10.00 per hour is a heap of money  and it probably was back when they last had a honest job.  Therein lies the biggest reason the Founding Fathers never envisioned career politicians.  They sought to have honest citizens take a turn serving and then return to their former lives. These bozos have to go, all of them republican and democrat alike. Collectively they are disaster.


And you can just bet the farm that if they did eliminate the mortgage deduction that they would exempt themselves from it.


That's another reason they have to go.

Feb 22, 2013 5:49PM
Wealth redistribution...this is how you do it!  More out of the middle class, to be funneled to the rich and the poor once again.
Feb 22, 2013 5:45PM
If they do away with the deduction, I will have to cease home improvements using my home equity, let my house run down, bring my property taxes down  to almost nothing because my house is so awful, not provide all of those jobs to contractors, electricians, plumbers, etc.  that I have done so willingly in the past to keep my house looking spiffy.  This stupid decision would be a spiral disaster.
Feb 22, 2013 5:44PM
The reason people don't claim it is because of low internest rates.  When interest rates start climbing back up this will cost the government more in the future.  Back in the 70's when interest rates were above 10% this was needed to spur house buying, but if they get rid of it now and interest rates start to climb back the government will have a new revenue source to pay off China.
Feb 22, 2013 5:44PM
The fact the reporter use the words "save as much as" twice the piece tells you all you need to know!  The reporter and the editor, and probably everyone in their office believe that taking a tax deduction away would "save" money for the Government.  The Congress, and the committee in question believe that as well!  Allowing me not to pay and/or owe so much tax at the end of the year by allowing me to reduce my taxable income for my mortgage int. paid amount, only saves ME money!  Not Congress or the Government!  They dont "pay me money" when I take a tax deduction!  They dont "pay" my salary, and they sure dont pay me the benefits I deserve for all the taxes they steal from me.  Look at SSI, they take almost 8% of my income for life, and another 8% from my company that I never get in a raise or bonus, since they have to give it to the Government, and what do they do with it???  Is it the "Trust Fund" growing into a huge retirement fund??? NO!  Is it being invested so I have a great retirement, NO!!!  Will I be a millionaire after 50 years of having 8% of total income stolen from me, like I would had I simply been allowed to invest that amount in a very conservative investment???NO!!!  The Government does not "SAVE" money, because they dont have any money, and they dont give tax payers any money.  Now if they want to save money, lets cut the EIC so nontax payers dont get cash rebates from others taxes, or cut food stamps, and education, where most of the money goes to administration, and the programs actually do "cost money" that could be "saved" if managed properly!  And there are 100s of others out there.  But as the piece proves, its a mindset now!
Feb 22, 2013 5:42PM

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


Few use it

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

So is this what would be saved if it was cut - or is this what would be saved if everyone used this credit?  Washington has a way of spinning numbers to make people say they'll go gladly give it up then next year when the real numbers come in (after the credit is eliminated and won't be reinstated or also known as they got your money again) they will say it only brought in 1 million cause not everyone itemized.


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