This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Your Chances of Losing Mortgage Deduction Are Small

NEW YORK ( TheStreet) -- The headline in Monday's New York Times was enough to chill anyone with a mortgage: "Mortgage Interest Deduction, Once a Sacred Cow, Is Under Scrutiny."

The story went on to say that Congress and the White House are considering ways to trim this cherished deduction as a way to raise billions. Would this make homeownership less desirable?

In some cases yes, though owning would most likely continue to be better financially than renting, at least for people who plan to stay put for a number of years. But before panicking, homeowners -- and those who wish to join them -- should take a reality check. Trimming this deduction might not be as bad as you think.

First of all, this may never happen. Homeowners have lots of friends in Washington, and Congress could face a voter rebellion if it cut too deeply into a tax benefit many see as a sacred right.

Second, most news reports suggest the most likely cut, if there were any, would affect only wealthier households. President Barack Obama and both Democratic and Republican members of Congress generally agree there should be no tax increases for households earning less than $250,000 (or $200,000 for singles).

Trimming the interest deduction might involve a cap on deductions for affluent households, or eliminating the deduction on second homes. Currently, interest payments on up to $1 million in mortgage debt can be deducted, even if some of it is on a second home.

But even more significant, the current deduction is not as valuable as many people think. Obviously, it's available only to homeowners who have a mortgage, and about of third of homeowners, including many seniors, own their homes free and clear.

Also, the deduction becomes less valuable over time, because as a mortgage balance is paid down, a smaller and smaller portion of the monthly payment goes to interest. With less interest to subtract from your income, the tax saving is smaller.

Finally, the deduction is available only to homeowners who itemize deductions on their federal tax returns, and tens of millions of homeowners do not. This is where the matter gets a bit complicated.

Smart taxpayers itemize only if itemized deductions total more than what they can claim with the "standard deduction" that is available only to taxpayers who do not itemize. Over the years, the standard deduction has become quite large. For this year it is $11,900 for married couples filing joint returns, $5,950 for singles. Like itemized deductions, the standard deduction is subtracted from taxable income, and you can take one or the other, but not both.

That means a couple's itemized deductions -- mortgage interest, gifts to charity, medical expenses and so forth -- must total more than $11,900 or it would make more sense to take the standard deduction.

It also means that the only true savings produced by itemized deductions is on the portion that exceeds the standard deduction. If a couple's only itemized deduction were $15,000 in mortgage interest, the mortgage would add only $3,100 to the deductible income -- the amount exceeding the $11,900 available on the standard deduction. If this couple were in the 15% tax bracket, the mortgage deduction would save them just $465, not $2,250 (15% of $15,000).

Of course, any deduction's value also depends on one's tax bracket. If you were in the top 35% bracket, deducting $1,000 would save you $350 in taxes. But you'd save only $150 if you were in the 15% bracket.

So Washington does bear watching, as there's no doubt trimming the mortgage deduction could be expensive for some homeowners, especially those with big mortgages and high tax brackets. But it seems unlikely that modest changes in the law would be devastating for the average homeowner.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $117.81 0.00%
FB $105.45 0.00%
GOOG $750.26 0.00%
TSLA $231.61 0.00%
YHOO $32.94 0.00%


Chart of I:DJI
DOW 17,798.49 -14.90 -0.08%
S&P 500 2,090.11 +1.24 0.06%
NASDAQ 5,127.5250 +11.3820 0.22%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs