Q: I recently purchased my first property. My concern is: Will the home mortgage interest deduction (MID) still be available for use? –Roberto
A: As you know, homeowners are currently able to deduct the interest they pay on their mortgages, by and large — the tax code also authorizes homeowners to deduct their property taxes.
To take the deduction, you have to itemize your tax return, and it turns out that for some homeowners, the standard deduction is actually larger than what they pay in property taxes and mortgage interest, so those homeowners take the standard deduction. Additional restrictions on the deduction as it currently stands include that:
- It applies only to the first $1 million of mortgage debt used to buy or fix up a home;
- It applies only to mortgage debt on a primary or second home; and
- It applies only to the first $100,000 in home equity debt — no matter what the debt was used for.
Since 1913, when the tax code began authorizing a mortgage interest deduction, the deduction has been two things. First, it has been a primary motivator and rationale for people to buy homes in the first place — the deduction essentially reduces the owner’s net costs of housing, making her home more affordable than if she were renting a place at the same monthly payment.
Second, it has been untouchable, politically speaking, because homeowners, homebuyers, home sellers, homebuilders, mortgage banks and the entire real estate industry, to name a few massive constituent groups, are so clearly in favor of the deduction that it has been considered career suicide for decades for any politico to even suggest that the deduction be reduced or eliminated — until this recession.
Last fall, the bipartisan National Commission on Fiscal Responsibility and Reform was tasked by the Obama administration with finding big budget cuts that could bring the federal budget into the black, which is no small feat. And the two chairs of this commission, former Republican Sen.
Alan Simpson and former chief of staff for President Clinton, Erskine Bowles, were equal to the challenge: They issued a sweeping plan to cut the overall tax rate, but also to eliminate or reform hundreds of tax exemptions, in a plan that would actually increase tax revenue by $80 billion annually, and bring the deficit down by $4 trillion by 2020.
Notably, the co-chairs’ proposal suggested the elimination or reform of many of what the Los Angeles Times called "pet projects" of politicians, like earmarks and other longtime sacred cows including the one you write to ask about: the mortgage interest deduction.
For this reason, many legislators were stunned that Simpson and Bowles even "went there," so to speak; some applauded their boldness, while others just wrote the plan off as dead on arrival, labeling it a "nonstarter."
Simpson himself even pointed out that no stone was left unturned, no tax exemption or budget cut considered too precious: "This is not the usual stuff. It’s all out there. We have harpooned every whale in the ocean."
Ultimately, the proposal was not adopted, but what its authors said then about that has since been proven true, which is that the debt drama is not going anywhere. At some point, we’re going to have to deal with it, and when Congress decides it’s ready to get serious about tackling the deficit, its members will, of course, circle back and reconsider the cuts proposed in this report.
And that’s exactly what happened in the debt-ceiling debate — the mortgage interest deduction issue was put back on the table, although again was left untouched. And I imagine this is the cause for your concern. But I don’t believe you need to be concerned that the MID is going away anytime soon.
To understand why, let’s take a deeper look at what exactly has been proposed. No one has seriously proposed that the deduction be eliminated entirely; rather, it was suggested that it be reformed.
One reform suggested in the co-chairs’ report was that the deduction should simply offer a blanket 12 percent, nonrefundable tax credit for every homeowner, not just for those who itemize. (Currently, the deduction is refundable; homeowners who end up with a net negative tax liability because of their MID are issued a refund check.)
An alternative proposal was that the deduction should simply be limited to the first $500,000 of mortgage debt rather than the first $1 million.
Even though most homeowners in America would still benefit from the MID under these proposals, they are still much tougher than anything that is likely to actually become law in the next decade, while the housing market is still in recovery mode.
What is more likely to become law are the very minimal tweaks to the MID of the vein the president included in his latest budget proposal, which will affect very few Americans: Single taxpayers earning more than $200,000 and married taxpayers with incomes of more than $250,000 would have a 28 percent cap on their mortgage interest deduction, under the most recent proposal for this coming fiscal year.
It’s also likely that the MID could be eliminated on second homes and home equity lines of credit. The long and the short is that no one in Congress wants to be seen as endangering the housing market’s recovery, even if they disagree in principle that homeownership should be federally subsidized via the MID.
So, if I were a first-time homeowner of a moderately priced home, like you, I would not be worried. I am a homeowner and am not worried about the MID disappearing anytime soon.
Barney Frank, D-Mass., ranking member of the House Finance Committee, perhaps best articulated the prevailing sentiment on the Hill, even among those who, like himself, disagree with the deduction in principle: "The mortgage interest deduction is going nowhere. The sun will go away before it does.
"Given the extent to which people’s legitimate, vested interest include that, trying to abolish it now, even if we were in a wonderful economy, would be unfair. You cannot do it without being disruptive to people. Houses are still a large part of the wealth for many people. I think it’s important for people to know that that’s staying around and we can build on that," Frank said.