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Is Your Mortgage Deduction Under Fire?

Do you hear the rumble of heavy weaponry? It's not the military's latest training exercise over Washington, but the big housing-industry lobbyists fixing for war. They say nothing less is at stake than the mortgage interest deduction. Next to fall will be motherhood and apple pie.

Here's what sent them to the battlements: The Obama administration's budget proposal would limit the ability of upper-income folks to deduct home mortgage interest from taxable income. For couples earning more than $250,000, or $200,000 for singles, the budget would reinstate the limitation on claiming itemized deductions, including the one for mortgage interest. Note the word reinstate. This limit is not a new thing; upper-income folks have seen part of their itemized deductions wiped away for years. So what's really going on here?

I asked Mark Luscombe, principal tax analyst for CCH, whether this would be a new hit on homeowners -- or just a return to old tax policy. His company publishes tax guides that line the shelves of accountants across the country.

It's a return to old policy, he said. Higher-income taxpayers have had to give up a portion of their itemized deductions for years. But a 2001 law called for getting rid of the limit on itemized deductions over the course of several years, starting in 2006. For the 2008 and 2009 tax years, the reduction is only one-third as severe as it once was -- but it's still there. The new budget would simply put the limitation back at full force, which means high-income taxpayers would be able to claim only part of their itemized deductions, including mortgage-interest.

Let the debate begin: Do you think the new proposal is fair? Or would it be an unnecessary burden on a struggling housing market? And should there even be a tax deduction for mortgage interest in the first place?


By Elizabeth Razzi  |  February 27, 2009; 6:00 AM ET
Categories:  Taxes  
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Next: Homeowners, Renters and Taxes


I hate to suggest making things more complicated, but am I the only one who feels that geography matters a great deal in both income and expenses in this country? The government has already realized this for conforming loan limits (although in my experience that hasn't really worked that well in practice). I don't really have a problem with reducing deductions on high income earners, but I do think that the definition of high income is very relative. A couple earning $250,000 in Manhattan may still be well off, but they are living a totally differnt lifestyle than someone making $250,000 in Greensboro or Des Moines or almost anywhere else!

Posted by: Arlington_22207 | February 27, 2009 8:23 AM | Report abuse

Whether it is "fair" or an "unnecessary burden on the housing market" is moot; trillions of dollars have to come from somewhere, and the increasing rolls of the unemployed and homeless don't look like a very good bet.

I fully expect to offer my rental properties for free beginning sometime this year.

The renters are going to lose their tenuous jobs, and I'm not going to be able to find replacements, so I see no reason to throw them into the street.

Meanwhile, according to the assessor, this ideally located home w/pool and quarter-acre deck has increased in value 10% even though I couldn't sell it for what I paid for it 11 years ago.

You can't milk a dry cow, much less a dead one, so you might as well kill the ones giving milk.

Posted by: gpsman | February 27, 2009 8:43 AM | Report abuse

The whole idea of propping up the housing industry with the stimulous package and then bashing it with a budget is rediculous. Also lets talk about the unfairness to married people. If you make 200,000 as a single person you are rich. If you make 250,000 as a two income couple you are rich. Why shouldn't "rich for married people be 2 times 200,000 or $400,000. Another marriage penalty. I thought we were losing the mariigae panalty. The whole idea that this country can afford to isure everyone for free is obsurd. So is the idea that couples living in major Metro areas making 250,000 are "rich". These couples are especially not rich if they are head of housholds with children. Obama's plans are quite scary to middle americans who are not "rich making $250,000 as a couple..

Posted by: politicalobserver1 | February 27, 2009 10:16 AM | Report abuse

gpsman said:

"Whether it is "fair" or an "unnecessary burden on the housing market" is moot; trillions of dollars have to come from somewhere, and the increasing rolls of the unemployed and homeless don't look like a very good bet."

What he meant to say was "from each according to ability...."

Posted by: damulljr | February 27, 2009 10:45 AM | Report abuse

Geography DOES matter. Not only does the government take into account geography for loan limits, they also apply it when paying government employees - it's called a locality adjustment, so that government employees who work in high cost of living areas are compensated at a higher rate than government employees elsewhere. As to whether there should be a deduction for mortgage interest at all, considering how home loans are set up, i.e., 30 or 15 year amortized loans, wherein the interest is paid back in a greater amount in the beginning, yes, I think it should be deductible. It encourages home ownership vs renting. To remove that incentive, especially in the light of the current economic and housing market, doesn't seem to make a lot of sense to me.

Posted by: jatwell622 | February 27, 2009 11:15 AM | Report abuse

politicalobserver1 said:

"Obama's plans are quite scary to middle americans who are not "rich making $250,000 as a couple.."

I'm fine with debating the difference between rich and super-rich, but $250,000 income households, regardless of location, are not middle class households.

Our government needs to find a way to balance the budget. That means balancing revenue they receive from taxes, tariffs, and trade against spending. Revenue needs to go up and spending needs to go down. No one wants to pay more in taxes, but we need to be realistic as a people and accept the fact that we need to pay our part for all of the privileges that our nation provides to all of us.

Yes his proposed budget still has the country operating at a loss, but it at least is moving it in the right direction.

Posted by: cgriesba | February 27, 2009 11:15 AM | Report abuse

You are only reporting half the story. Yes, they're reinstating the old limits, known as "PEP" (for personal income phase-out) and Pease (named for a former congresscritter, now deceased). But there is a *new* proposal that would limit the itemized deductions to 28 percent, so people in the top tax brackets would get less tax savings for their mortgage interest and charitable donations. If you were in Obama's 39.6 percent tax bracket and give $1000 to charity, you'd only save $280 in taxes from the deduction under the proposal, versus $396. *THAT* is what they're concerned about. But given that only 2.6 million people pay in the top brackets, it's an open question whether it's really a valid concern.

Posted by: bigdaddyva | February 27, 2009 2:48 PM | Report abuse

The Mortgage interest deduction only applies to Seasonal or vacation homes not principal residences.

I own one house, earn less than $250,000, I can deduct all interest on my home.

You earn more than $250,000, have a principal residence and two vacation homes, You will not be able to claim for a deduction all the interest on all three houses.

This was started under Bush the first. Just like Taxing Social Security payments of the wealthy was started by Reagan.

Posted by: ddoiron1 | February 28, 2009 10:44 AM | Report abuse

Mortgage interest deduction applies to primary and secondary (vacation) homes' combined amounts, up to a $1,000.000 limit, with phase-out starting at around an income of $160,000 or more. See IRS publication 936 instructions as well as Schedule A, form 1040.

Posted by: ALFIERO1 | February 28, 2009 11:14 PM | Report abuse

So lets see - next week I was planning to buy a $3,500 gym from a small fitness store and was considering getting my house painted by a guy painting my neighbor's house (his crew has nothing going on once they finish up). Now thanks to Barack I think I'll put both purchases on hold since I'm "rich" and am curious from how many directions I'll get corn-holed. I sure hope these small business owners find another way to get the cash I was going to provide them.

Posted by: Stomp | March 1, 2009 12:49 AM | Report abuse

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