Mortgage Deduction Safe for Most
Should you be worried that Congress will take away your mortgage interest deduction as part of the "fiscal cliff" negotiations now underway? For the great majority of homeowners, the answer is "no."
In fact, there's absolutely no chance that Congress and the President will kill the home interest mortgage deduction, despite what you may have been hearing. None. Zero. Nada. Zippo.
What is being considered is that the deduction may be limited to some extent as a part of the combination of spending cuts and revenue increases that will make up the final agreement, whatever form it takes. But the proposals under consideration are targeted at higher-end homeowners and even those would only trim the deduction, rather than getting rid of it entirely.
The leading plans
Currently, homeowners are allowed to deduct the interest on mortgages of up to $1 million on their primary residence. One proposal that is making the rounds, that was put forward by the Simpson-Bowles Commission, would reduce that cap to $500,000.
That would still allow wealthy homeowners to deduct the interest on their first $500,000 of mortgage debt, which at a 4 percent interest rate would amount to about $20,000 in interest.
Homeowners can also deduct the interest on up to $100,000 in mortgage debt on a second or vacation home under current law. Some lawmakers are pressing for that deduction to be eliminated entirely.
A 28 percent rate cap
President Obama has on several occasions proposed that the tax rate on deductions currently be capped at 28 percent, rather than the maximum 35 percent now allowed. In other words, homeowners in the current 33 or 35 percent tax brackets wouldn't get full relief from a mortgage interest deduction. On the example above, that would cost them from $1,000-$1,400 on $20,000 in mortgage interest - or 5-7 percent, the additional percentage above 28.
Capping the deduction at a 28 percent tax rate would affect single taxpayers with taxable income above $178,650 and couples filing jointly with taxable incomes over $217,450 - that's the top end of the 28 percent bracket for 2012.
Another proposal getting serious consideration, according to the Wall Street Journal, would cap all deductions at $35,000. So if someone paid $20,000 in mortgage interest, they could still deduct another $15,000 for charitable donations, state and local taxes, medical expenses and the like.
How many would be affected?
So how many homeowners would this affect? According to the National Association of Realtors, 11.1 percent of U.S. homes were valued at $500,000 or more in 2009. It's not clear how many homeowners have mortgages that large; residents with a property valued that much would typically have a smaller mortgage, due to down payments and amortization, although a share of such homeowners still remain underwater on their loans and have mortgage balances that exceed their property value.
In terms of income, only 1 percent of all returns paid tax rates above 28 percent in 2008, the most recent year for which the IRS makes data available on the Tax Statistics page of its web site.
To be sure, the impact of limiting the mortgage tax deduction for high income earners or high-value homes would be felt disproportionately in different parts of the country. In cities like Palo Alto, Mountain View and Newport Beach, Calif., nearly 50 percent or more of all homes are valued at more than $500,000. In about 50 cities nationwide, the share of homes valued over half a million dollars is greater than 10 percent.