Current homeowners support the mortgage interest deduction not just because it saves them money—over time, about three-quarters of American taxpayers will benefit from the mortgage interest deduction—but also because they know it’s integral to the housing market.
Mortgage deduction savings
Having a tax deduction for mortgage interest makes owning a home more affordable because the deduction lowers the amount of tax you pay. U.S. Census data shows 37% of homeowners with mortgages spend more than 30% of their income for housing. Paying less for housing means having more disposable income for savings and other household expenses.
Increasing housing affordability increases the number of renters who can afford to buy a home of their own. Increasing the number of homebuyers helps keep home prices stable for those who already own homes by ensuring a steady stream of new buyers.
How the deduction works
In general, any homeowners who pay U.S. taxes and who itemize their taxes can deduct mortgage interest attributable to primary residence and second-home debt totaling $1 million, and interest paid on home equity debt of as much as $100,000.
Mortgage interest deduction threatened
In recent years, the mortgage interest deduction has come under attack. President Obama’s fiscal year 2010 budget proposed limiting the value of the mortgage interest deduction for upper-income taxpayers, by allowing them to deduct only 28 cents on the dollar, even if they’re in a 33% or 35% tax bracket and can now deduct 33 or 35 cents on the dollar.
In August of 2009, the Congressional Budget Office suggested two ways Congress could cut spending by changing the mortgage interest deduction:
- Reduce the $1 million cap by $100,000 a year beginning in 2013 and ending at $500,000 in 2018. This would generate $41.4 billion in additional revenues over 10 years, CBO says.
- Change the mortgage interest deduction to a 15% tax credit, which would increase revenues by $387.6 billion over 10 years.
In the past, members of Congress have suggested other mechanisms for eliminating or limiting the mortgage interest deduction. None of those has ever gained traction.
Opponents question fairness
Those who want to eliminate or reduce the mortgage interest deduction argue that it primarily helps the wealthy, since high-income taxpayers are more likely to itemize their deductions and to own homes. About 90% of taxpayers earning more than $100,000 itemize, while only 18% of those earning less than $50,000 follow suit, the Tax Foundation estimates.
Taxpayers who don’t itemize deductions, however, do benefit from the so-called “standard deduction,” which simplifies taxes for those with relatively straightforward financial circumstances.
Those who could—but don’t—take the deduction often save more by using the standard deduction than itemizing. Therefore, they’re getting a greater tax benefit, in relative terms, than those who itemize.
More than 60% of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000, NAR estimates. Only 2% of those taking the deduction are high-income taxpayers. What’s more, a disproportionate number of those high-income taxpayers live in areas where housing is especially expensive, such as California and New York.
In high-cost housing markets, lowering the $1 million cap would add a tax burden onto families who already must pay high prices for homes.
Protecting the deduction promotes housing
People don’t buy homes because of the mortgage interest deduction. They buy homes to satisfy social, family, and personal goals. As the cornerstone of a healthy community, homeownership is the basis for positive community involvement and a family’s first step on the ladder to wealth.
In supporting the mortgage interest deduction, you help ensure that tomorrow’s families can follow the same path to homeownership that so many of us have already traveled.
Dona DeZube, HouseLogic’s News Editor, has been writing about real estate for over two decades. She lives in a suburban Baltimore 1970s rancher on a 3-acre lot shared with possums, raccoons, foxes, a herd of deer, and her blue-tick hound.
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(3)I can't believe Obama is even considering cutting back on the interest deduction. Does he have no clue? We take that deduction every year.
If this is the kind of reporting this site will feature, it should be renamed House Illogic. There are numerous articles that really examine this deduction statistically to reveal that it primarily only benefits the wealthier Americans, who would buy a home regardless. For this reason the majority of economists believe the elimination of the deduction would have little, if any, impact of home prices. And the government isn't even talking about eliminating it, they're just talking about reducing it. And only for the couples making over $250k or singles making over $200k-- a threshold this article conspicuously fails to mention, in view of its citation that 60% of those who take the deduction earn between $60k-$200k. Also conspicuously absent? Any mention of the fact that about 75% of the interest deduction money goes to people with incomes over $100k a year. (FYI, a Bush administration commission recommended eliminating the deduction entirely, because it makes no sense when you examine it.) This article states: "Increasing housing affordability increases the number of renters who can afford to buy a home of their own." True. And by the logic of this article, eliminating the deduction would reduce home prices and therefore increase affordability. So which is it? Under the model this article uses, who does the interest deduction really benefit? Well, if it keeps home prices higher, it really benefits banks and real estate agents. Banks because they get to collect more interest on higher priced homes and real estate agents because they end up getting higher commissions. But renters? They're primarily on the lower end of the income scale and would BEST be served if actual prices were lower. Tax deductions, exotic loans, interest rates, etc. are only tricks to get people to buy homes that are essentially overpriced. When you add up what they DON'T get to deduct in taxes and the interest they pay over the life of the loan, lower prices would be of much greater benefit to them than a deduction (or lower interest rates). For anyone who wants FACTS on the mortgage interest deduction, here are a few links: Wall Street Journal: http://tinyurl.com/yl6ptfz More Wall Street Journal: http://tinyurl.com/yk8oz33 New York Times: http://tinyurl.com/ydg8mh6 MSN Money: http://tinyurl.com/yc2zry6 50 page Rice University study: http://tinyurl.com/yzkl9qk I'll be interested to see whether this comment stays up. It will reveal whether or not this site is a vehicle for self-serving spin. (Keeping a copy of this comment to share with others and the media if it gets deleted.)
Thank you for your comments. The mortgage interest deduction is a complex topic, with well-reasoned, researched, and valid arguments on both sides. NAR believes in the value of homeownership for individuals and communities. People buy homes for many reasons and find value in them beyond the financial aspects. We also understand that homeownership isn't necessarily for everyone.
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