What would happen to homeowners if the mortgage-interest tax deduction were eliminated?
It’s not likely to happen tomorrow, but the idea has some advocates as Washington ponders reforms to the mortgage market after the catastrophes of the past few years. Scrapping the time-honored deduction would hurt many homeowners, but many people think the deduction is worth more than it is.
Regulators, academics and mortgage-industry executives recently met in a conference to discuss the future of the mortgage market, and the Obama administration plans to have detailed proposals in January. The administration has previously proposed limiting the mortgage-interest deduction for wealthy taxpayers, and some experts think a broader attack on the tax break could help reduce the federal budget deficit.
Some economists argue the deduction isn’t necessary to encourage home ownership. Canada, for example, has about the same homeownership rate as the U.S. but offers no deduction.
And critics of the deduction say it’s unfair for tax policy to favor homeowners over renters, or to favor those with mortgages over others, such as many elderly homeowners, who paid their mortgages off. The deduction is also more valuable to wealthier homeowners because they are in higher tax brackets, while it provides no value to homeowners, many of modest means, who do not itemize their federal tax returns.
So many factors affect an individual’s tax bill that it’s difficult to say just how valuable the break is for the typical homeowner, if there is such a person. But it is easy to overestimate the break’s value. (Check your situation with the Mortgage Tax Savings Calculator.
A home buyer taking out a new 30-year fixed-rate mortgage at today’s rate would pay $4,667 in interest for every $100,000 borrowed. At a 25% tax rate, the interest deduction would save the homeowner $1,167 in taxes.