Possible End of Mortgage Tax Deduction Worries Homeowners
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Possible End of Mortgage Tax Deduction Worries Homeowners
By Jack Katzanek
Tax reform has been a frequent campaign issue this year, with tax cuts enacted under former President George W. Bush scheduled to expire at the end of this year.
Among the many changes discussed is one beloved by homeowners across the country — the mortgage interest deduction.
If homeowners were no longer allowed to deduct the interest they paid on a mortgage — the only significant deduction for many — it might convince thousands that their best move is to walk away from their homes, experts say. It could also curtail discretionary spending and hurt the retail sector of the economy.
No one knows how large a role tax deductions on mortgage interest will play in the Washington debate as Congress tries to deal with spending and taxes. Experts predict it would be unlikely that any new policy would wipe out the deduction entirely in one year. The more likely scenario would be a phased-in program that starts with expensive houses.
According to a recent Pew Research Center study, the best definition of middle income is about $68,000 for a family of four. Most at that level might contribute something to their church or write a modest check to the Red Cross but are not likely to accumulate enough charitable contributions to make a big difference at tax time.
“I don’t know why they took away the other deductions, like the car notes and the credit cards,” Ronald Newton, a 72-year-old retired shipyard foreman in Menifee, Calif., said, referring to tax code revisions made in the mid-1980s. “About the only thing I have left is my mortgage.”
According to the congressional Joint Committee on Taxation, an estimated 40 million homeowners take the mortgage interest deduction every year, and the average savings is about $600. The mortgage deduction shrinks the federal government’s coffers by $82 billion a year.
Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, testified last year before the U.S. Senate Banking Committee that the deduction, which has been around for almost 100 years, is outdated and does not encourage homeownership.
What it does is encourage debt and spur consumers to purchase bigger houses than they would otherwise. Green told senators a tax credit for buyers would go further in getting first-time buyers into homes.
Research economist John Husing said that many people are still making regular payments on a house purchased for well more than it is worth now and have little cash left over after writing that check.
“If you take away the mortgage interest deduction you’d take away part of their income, and we’re not talking about very wealthy people,” Husing said.
Taking a deduction for mortgage interest is considered an important part of many taxpayers’ financial plan, said Jamil Dada, vice president for investments at Provident Financial Holdings in Riverside, Calif. Frequently he advises clients not to pay down extra mortgage debt and use excess cash to take care of other payments.
The reason, Dada said, is that credit cards and other debt are not tax-deductible.
“It’s more beneficial to have cash flow,” Dada said.
Dada, a ranking official of the National Association of Workforce Boards, said it is unlikely the deduction would be eliminated outright because hitting middle-class taxpayers that hard would be politically dangerous.
Green said his guess is that Congress would look at mortgages worth $1 million first and possibly drop that level down over a period of years.
“It’s one thing to look at an ideal policy, and another to get there,” Green said.
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