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More on Mortgage Interest Tax Deductions

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There is nothing surprising about the fact that President Bush is receiving strong criticism for his advisory panel recommending removal of the tax deduction for home mortgage interest. The President’s advisory panel is a nine-member board that is recommending the following in its report next week:

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First, they recommend lowering the mortgage interest deduction cap; this is the amount of a mortgage for which individuals would receive a tax deduction for interest paid on the loan. Presently this cap is set at one million dollars. They will lower this to levels in line with regional housing prices. This is estimated to be between $172,000 and $312,000 depending on the area of the country.

Second, they want to change the deduction to a credit that equals roughly fifteen percent of what you paid in mortgage interest up to the cap. A tax deduction claimed will reduce the taxable income on your return; credits on the other hand, are a dollar for dollar deduction from the taxes you pay. This is being touted as a benefit to the proposed recommendations.

For the most part, the larger your home mortgage and the higher your income the more you have benefited from the previous interest deductions on your tax return. Under the tax credit you will see less of a benefit. For example, a person who owes $20,000 each year on a $350,000 mortgage loan that itemizes their tax return each year was able to reduce their taxable income by $20,000 each year. With the proposed system this person would only save approximately $3,000 each year opposed to nearly $5,000 under the old system.

This change may cause many homeowners to stop itemizing their tax returns completely, opting for the standard tax deduction along with the mortgage credit if they qualified. It may be some time before any of the panel’s recommendations are implemented. The last time the government overhauled the tax code was 1986; this was 10 process before the changes were implemented.

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