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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 9:37PM
wait until inflation takes off in a couple of years due to printing money and interest rates go back up. No deduction -- goodbye housing industry or the only houses will be 1000 sq feet.
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 9:26PM
I will have to sell my home if we lose this break.  We still owe taxes at the end of the year WITH the tax break.  No way we can pay more taxes with the mortgage we have.
Feb 21, 2013 9:23PM
take the deduction away & start the revolution ...........
Feb 21, 2013 9:14PM
This deduction, years ago used to attract first time home-buyers, the economy  was all the better when young couples bought into home owning. Taking this away, just another way to destroy real Americans Dreams.
Feb 21, 2013 9:12PM
We have lost 40% equity in our house we built in the last 5-years.  We cannot get a low interest rate so we are paying 7.25 %.  Our taxes have not gone down and we are so under-water.  If the mortgage interest rate goes down, we will have to walk away from the home we love.  We will have worked all our lives for nothing. 
Feb 21, 2013 9:04PM
The deduction should be on mortgage amounts up to $200K only, and also not on vacation homes.  That makes it a true middle class deduction.  
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 8:58PM
limit it to 200K mortgage only and no vacation homes
Feb 21, 2013 8:48PM
Well, I own several homes, not because I want to but because I lost my job and relocated and can't sell.  So what does Congress expect me to do?  I could just stop paying my mortgage on the other house and let it go into foreclosure?  Now is NOT the time to play with this deduction.  I can see limiting it to something like only using $300,000 in interest down from $1 million?
Feb 21, 2013 8:46PM
Come on people... they need to eliminate the deduction so they can pay for all Obama's up and coming Welfare Recipients! You know, the middle working class Americans that he is so tirelessly trying to destroy with all his new programs that only apply to the Working Class!
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 8:33PM
I tell you what, kill the mortgage interest deduction.  Kill EIC.  Kill all itemized deductions, including charitable contributions.  And I don't mean leave loopholes, remove all deductions, including the standard deduction.  Make a flat rate tax of 18%.  18% of what you make, be it interest, salary, investments, inheritance, or anything else you can think of gets paid in taxes.  You think that might help our country's financial woes?  Of course it will never happen because we have lobby's.  Legal bribery, not to mention uncapped campaign contributions.
Feb 21, 2013 8:33PM
These SOB's better not even think of it!
Feb 21, 2013 8:29PM
"Our mortgage interest deduction doesn't directly support homeownership; instead, it supports mortgage indebtedness, which isn't the same thing at all,"

If you have an interest-only payment, you can write off your entire house payment without actually building any equity in your home "ownership".  It's disgusting.  If the government really wanted to encourage homeownership instead of indebtedness, have a deduction based on either the fact that you own a home or the value/purchase price of your home, NOT how much interest you're paying on DEBT!

As much as I love the mortgage interest deduction because I can use it, I can see how backwards it is.
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 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 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 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 7:35PM
Wth todays low interest rates those with modest mortgages find it hard to exceed the standard deduction with so few other deductions allowed. Forty years ago when you could deduct all medical expenses, home mortgages and credit card debt almost all home owners itemized.
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