Home Sweet Home: Mortgage interest deduction could impact ‘fiscal cliff’

It’s no secret that the federal government is desperate for money and is looking for ways to raise some cash.

President Barack Obama has said it will take $1.6 trillion in new revenue over the next decade to shrink federal deficits and pull the nation’s economy back from the so-called “fiscal cliff” that threatens to plunge the nation back into a recession. If the federal government doesn’t come up with an agreement by the end of the year, a series of tax hikes and spending cuts will go into effect, and that has lawmakers worried.

Lawmakers in Washington, then, are busily arguing over tax increases, spending cuts and other measures in hopes of avoiding calamity. And, of course, there’s been some discussion about limiting tax deductions — closing loopholes that allow some Americans to keep more of the money they’ve earned.

One of the deductions under fire is the mortgage interest deduction. That particular deduction, according to some policymakers, costs the federal government about $100 billion a year.

What is the mortgage interest deduction? It allows taxpayers to deduct interest on mortgages up to $1 million for a primary residence and interest up to $100,000 in home-equity loans, second homes or vacation homes. Bear in mind the deduction is subtracted from taxable income — it is not a dollar-for-dollar deduction.

Keep in mind, too, that a good number of homeowners don’t use the deduction at all. The IRS allows taxpayers to either itemize deductions or take the standard deduction of $11,900 for married couples, $5,950 for single people or $8,700 for people eligible for “head of household” status (most often single parents).

Still, there are fears that eliminating the mortgage interest deduction could dash hopes of a housing recovery and shrink home values. Perhaps in response to at least some of those concerns, it appears there aren’t any proposals gaining traction that would eliminate the deduction entirely.

One proposal would reduce the $1 million cap on value to $500,000. In other words, people with homes valued at $500,000 or less would still get to claim the full mortgage interest deduction, while those with homes more than that could claim a deduction for interest paid on value up to that cap.

A related proposal would eliminate the deduction on mortgages covering up to $100,000 for second homes and vacation homes.

Yet another proposal would cap deductions at a 28 percent tax rate. Everyone in higher brackets would be out of luck should any law be made to put that plan in place. What does that mean? Single people with taxable income of more than $178,650 and couples filing jointly with incomes more than $217,450 might not be able to claim a mortgage interest deduction. Yes, they’d miss out on a lot of other deductions, too.

Speaking of missed deductions, yet another proposal would cap all deductions at $35,000.

It’s important to remember that the mortgage interest deduction has a good number of staunch defenders, so you’d better believe that any attempts to alter it will be fought tooth and nail.

Regardless, a lot of people will feel the impact of any changes. It’s a good idea, then, to pay attention to what’s going on with the mortgage interest deduction issue.


Home Sweet Home is distributed by the Mortgage Bankers Association of Arkansas. Visit the association online at mbaar.org.