National Debt Puts Mortgage Interest Deduction at Risk
At some point in the next few days there will be some kind of deal coming out of Washington that will pair some kind of spending cuts with some kind of revenue enhancements.
My guess is that revenue enhancements will come, not at the cost of raising tax rates, but by closing loopholes. “Loophole” is a term used to describe a tax advantage used by someone else. One man’s tax deduction is another man’s loophole.
One of the items on the table and possibly the chopping block is the home mortgage interest deduction. If you are paying a mortgage on your first or second home, you can deduct the interest portion of those payments. You can also deduct points paid and some costs of obtaining that mortgage.
For example, if you are in the 4th year of an $180,000 mortgage written at 6%, you paid approximately $10,300 in interest this year. You can deduct that amount from your gross income when filing your taxes. Now, this is below the $11,600 standard deduction (for tax year 2011, married, filing jointly) that the current tax system allows, so you might think that this has no affect on modest income families. This is true only when taken as a single item. When combined with deductions for health insurance and medical costs, real estate taxes, and charitable contributions, losing the mortgage interest deduction can and will cost modest income families hundreds of dollars per year. The mortgage interest deduction is usually the largest component of a family’s deduction. Without it, the other deductions might have no benefit at all.
Ending the mortgage interest deduction will also discourage home ownership and have a negative impact on values. So, while the government has spent $billions on programs to sure up the housing market on one hand, they could very well hurt it with a stroke of the pen on the other. It will also lead to more structured defaults, where those who can pay their mortgage make a conscious decision to stop doing so.
More importantly, real estate investors sail by scot-free here, as mortgage interest on investment property gets deducted as a business expense.
I am not a proponent of any tax increases; the tax code is cumbersome and incomprehensible for the average citizen and needs to be simplified. Certain “loopholes” should be closed, but the mortgage interest deduction is not one of them. At a time when most families are struggling, taking hundreds of dollars out of their pockets is not the best course of action.
A call to your elected representatives in Washington is warranted.
Michael Loeb
TGC Financial
772-579-5001
Michael@TGC-Financial
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