Wednesday, December 8, 2010

Mortgage Interest Deduction on the hot seat?

The national debt is now $13 trillion and is expected to reach $20 trillion by 2020. The concern is so great that the National Commission on Fiscal Responsibility and Reform released suggestions to raise taxes and/or reduce spending.

One of the ideas of raising taxes is re-examining the biggest tax deduction in the U.S. tax code: the $130 billion per year home-mortgage interest deduction.

The threat of removing is the deduction is so big, the National Association of Home Builders (NAHB) created a website to provide information to concerned taxpayers. A recent Time Magazine article summarizes the national debt issue.

Currently, home mortgage interest is any interest paid on a loan secured by your main home or a second home. This includes a taxpayer's primary mortgage, 2nd mortgage, home equity line of credit, or a home equity loan with a limit of $1,000,000 ($500,000 if married filing separately).

This information can be pulled from box 1 of Form 1098 (pdf) and reported on line 10 of Schedule A (pdf).

The fact is the Mortgage Interest Deduction is the biggest reason middle-class taxpayers file Schedule A with their tax return and itemize as opposed to taking the standard deduction – a tax benefit that eliminates the need to itemize actual deductions covered on Schedule A. Currently, the standard deduction for most taxpayers is:
  • Married filing Joint / Qualifying Widower: $11,400
  • Head of Household: $8,400
  • Single / Married filing Separate: $5,700
By eliminating the mortgage interest deduction, middle-class taxpayers will simply skip the Schedule A and use the Standard Deduction instead. Debt-ridden taxpayers may be encouraged to take on less debt when making home purchases. Wealthy taxpayers will still itemize their tax deductions and the wealthy will own homes with or without the mortgage interest deduction.

Sounds like a slam dunk move. Eliminate a tax deduction for the wealthy, increase government revenue, reduce the national deficit. Don't bet on it. The National Association of Realtors (NAR) spent more than $20 million lobbying Congress so expect a fight.

Stay tuned.

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