If, like a lot of homeowners, youve recently seen the amount you saved in taxes from the mortgage interest deduction on your federal income tax form, savor the experience.
The national associations of home builders and Realtors have predicted that the mortgage interest deduction might be cut or curtailed, perhaps as soon as next years tax season, as lawmakers try to get a handle on the national debt.
Any time that Congress looks at tax reform, theyre going to look at the biggest deductions and credits in the code, and the mortgage deduction is one of the biggest, says J.P. Delmore, National Association of Home Builders assistant vice president for governmental affairs.
Fort Wayne Realtor Phil Stinson, president of the Upstate Alliance of Realtors, UPSTAR, calls the deduction low-hanging fruit in upcoming budgetary talks.
They are constantly looking for ways to get more revenue, and this one looks like its ripe and they can grab it any time they want, he says.
Just how big is the deduction? About 35 million households claim it, and federal officials estimate it amounts to more than $207 billion in fiscal 2011 and 2012 alone. About 70 percent of homeowners claim the deduction, a holdover from decades ago when all interest paid was deductible.
The mortgage interest tax deduction is predominantly used by the middle class, primarily by families, and is a large benefit for younger families and those with large families who have larger homes and are paying a lot of interest, Delmore says. About two-thirds of the deduction goes to families with incomes less than $200,000.
Eliminating the deduction would hurt those groups financially and could also wound the wallets of older people with recent home purchases. Thats because mortgage interest is front-loaded, meaning that a buyer pays more interest in the first years of a mortgage.
Aaron Hoover, a Realtor with Century 21-Bradley in Fort Wayne, says cutting the deduction could also wound a housing market just beginning to rebound.
The thought of taking it away does make you cringe, he says, adding agents often use the deduction as a selling point.
My thoughts are if you arent going to have that write-off and you owe Uncle Sam more money, the less disposable income you have – and youll be affording less house. It would negatively affect peoples purchasing power, Hoover says.
Stinson says the difference could be substantial. For a $100,000 house, he says, the savings from deducting mortgage interest over a typical 30-year mortgage at 4 percent interest would be about $13,000 for someone in the 20 percent tax bracket.
That $13,000 is a significant amount of money when youre looking at a $100,000 house. Its probably translates to another 200 to 300 square feet or a two-car versus a one-car garage or an extra bathroom or bedroom or a deck, he says.
The National Association of Realtors has calculated that eliminating the deduction, and an accompanying deduction for local property taxes, could depress home values – in Indiana, an average decline in home value of 15 percent. Under that scenario, the value of a $100,000 would drop to $85,000.
Delmore says an often-overlooked aspect of cutting the deduction is the impact on what he calls family formation. Already, because of the foreclosure crisis and tight credit, about 2 million homeowner households havent formed, he says, and when England phased out a similar credit, the age of first home-buying went up 8 to 10 years.
If you shift (home buying) from the late 20s to the late 30s, you have 10 years of investment being lost, he explains. Thats going to shift the make-up of the middle class because regardless of the experience of the last four or five years, home ownership is still the middle classs best investment, and it impacts wealth accumulation in later years and also entry to the middle class.
Lawmakers could consider options other than eliminating the deduction, Delmore says.
Some that have been discussed include lowering the maximum mortgage amount eligible for interest deductions to $500,000 from $1.1 million, replacing the deduction with a widely based tax credit and eliminating interest deductions on second homes or the deductibility of local property taxes.
Cutting of the number of income tax brackets from six to two, at 10 percent and 25 percent, as proposed by U.S. Rep. Paul Ryan, R-Wis., and approved by the House last month, could make the deduction less useful, as fewer people would benefit from it by dropping into a lower tax bracket.
The future of that idea is unknown, Delmore says, as the Senate has not voted on the Ryan plan and may not.
Pone Vongphachanh, a 30-something governmental affairs liaison for UPSTAR, says she doesnt use the mortgage interest deduction because her home is paid for. But the deduction still made a difference in her life.
It helped me get into my first home – definitely, she says, adding it would be hard to find a more popular federal tax policy.
I think they should remember a good percentage of voters are homeowners, she says.