Mortgage interest deduction pays dividends for homeowners
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Although recent reports of plans to eliminate or modify the mortgage interest deduction are widely exaggerated, the National Association of REALTORS® will remain actively engaged to ensure that the nation’s 75 million homeowners will continue to receive this important benefit.
The Deficit Reduction Commission recently released its recommendations toward reducing the U.S. deficit, which include modifying a number of popular tax breaks, including the mortgage interest deduction. President Obama created the 18-member, bipartisan commission earlier this year to identify ways to balance the budget by 2015. The commission does not have any legislative power, and the commission’s report is just the first step of a lengthy process.
In the midst of the all the discussion surrounding the report, however, there has been some confusion about the actual proposal, with some taxpayers expressing concern that the deduction would be completely eliminated.
This is not true. Rather than proposing to eliminate the mortgage interest deduction, the commission suggested giving homeowners a flat 12 percent tax credit for mortgage interest and capping eligible mortgages at $500,000 instead of the current $1 million. While the National Association of REALTORS® doesn’t support any changes to the current structure of the deduction, reports that the deduction would be completely eliminated are false.
In fact, this is just the beginning of the discussion on the Deficit Reduction Commission report. Last week, the Commission voted to send the recommendations directly to Congress but lacked the supermajority needed to automatically send the report to the Capitol. Now members of Congress will review the report and will decide if they want to incorporate any recommendations into legislation, although they are not required to do so.
The mortgage interest deduction, also known as the MID, has been in the U.S. tax code for nearly 100 years. Many consumers have and continue to base their financial decisions based on this tax benefit. If altering the MID ever becomes a discussion point in Congress, the REALTOR® community stands ready to defend it. The MID is both a powerful incentive for homeownership and one of the simplest provisions in the tax code.
The MID allows an individual to deduct mortgage interest paid on mortgage debt of up to $1 million. The deduction is available for interest on mortgages for a principal residence and one additional property. Individuals claiming the MID also must itemize their taxes.
The ability to deduct the interest paid on a mortgage can translate into significant savings at tax time. For example, a family who bought a home this year with a $200,000, 30-year, fixed-rate mortgage, assuming an interest rate of 4.5 percent, could save nearly $3,500 in federal taxes when they file next year.
The deduction is largely a middle-class benefit. According to the most recent IRS tax return data available, 65 percent of families who claim the MID earn less than $100,000 per year and 91 percent earn less than $200,000.
“Homeowners already pay 80 percent to 90 percent of U.S. federal income tax, and among those who claim the MID, almost two-thirds are middle-income earners,” said NAR’s Chief Economist Lawrence Yun.
In fact, the MID saves the average homeowner thousands of dollars at tax time and helps American home buyers get into their first house.
In today’s market, eight out of 10 home buyers must borrow money to buy a home. For aspiring homeowners who don’t have hundreds of thousands of dollars in savings to buy a home outright, tax benefits like the mortgage interest deduction help them begin building their future through homeownership.
To learn more about homeownership and its many benefits, contact your local REALTOR®.
By Lerron Little, CRS, GRI
Appeared in the Salt Lake Tribune and Deseret News December 11, 2010
December 15, 2010 | Share: