America has become known over the past three decades or so as the country where you buy a home, and instantly qualify for a tax deduction. However, in today’s economy and in the aftermath of the financial and housing crisis, the tax break is in the process of debate.
The Mortgage Interest Deduction
Currently, homeowners that pay taxes and itemize their deductions are allowed to deduct the amount of interest they pay on their mortgages up to $1 million, as well as up to $100,000 for home equity loans. A home equity loan is different than a mortgage due to the fact that the homeowner uses their actual home equity as borrowing collateral. Additionally, homeowners are allowed this deduction on a second home as well, another reason the whole situation is currently up for debate.
Due to the continual talks regarding tax reform as well as the loopholes that must be closed if there is any chance of reducing the U.S. national debt, mortgage interest tax deductions are up for a variety of alterations, and there is also the chance that this tax break for homeowners may be completely eliminated.
The Cost of the Deduction
The mortgage interest deduction is quite costly for the Treasury, approximately $100 billion per year in revenues. At this point, a host of politicians are looking to have this tax break for homeowners limited to a tax credit, possibly have the deduction completely eliminated, or minimize the deduction for those in the higher income brackets, which President Obama completely supports.
While the President and a variety of politicians are supporting these possible changes, there are definitely those that are against it, so there is potential for a long battle ahead.
According to figures documented by the Reason Foundation, households that utilized the deduction saved approximately $83 billion in taxes. However, approximately only 30 percent of all taxpayers even utilize this deduction each year, which clearly points to the savings being taken by those individuals in the high income brackets.
Canada and Great Britain
Currently, Canada does not allow for a deduction from taxable interest on any loan that has been secured by a Canadian taxpayer’s home. As a result of this, Canadian home ownership hiked up approximately 70 percent in 2012 alone.
In the early 1980’s, Great Britain began to phase out the tax deduction, and it was totally eliminated in 2000. However, home ownership is currently at a low, dipping to 63.8 percent from 72.1 percent in 2001. The main reasons for the slump are said to be the requirement of large down payments, stricter borrowing criteria, and higher overall prices on homes.
Eliminating of the Deduction
In addition to eliminating the deduction, the proposed bill would also eliminate tax benefits for homeowners with mortgages over $500,000, and President Obama has also proposed eliminating the tax deduction for homeowners that are above the 28 percent income tax bracket.
Governor Sam Brownback (R-KS), proposed at the local level an elimination on the mortgage interest tax deduction for all state taxpayers. While the proposal definitely had promise, a recent survey stated that approximately 63 percent of Kansas state taxpayers are opposed to this idea.
This is the type of public reaction that truly shows how hard it may be to actually make this change. While phasing out these deductions will not have much of an impact on anyone except the 30 percent or so that actually utilize them, the battle may still be long and drawn out, simply due to the fact that many people simply do not like change, especially change that affects their bottom line.