Home loan and mortgage tax deductions - are they going away?

Mortgage deductions possibly to be dropped from tax code.

Buying a home is an expensive proposition. There’s no getting around that. When mortgage interest is added to payments, the amount of money a typical homeowner repays over the life of the loan is more than twice the purchase price of the house itself.

One of the few forms of relief for homeowners is the ability to deduct the mortgage interest

from a Federal income tax return. We have discussed the mortgage interest deduction elsewhere; it’s somewhat of a mixed blessing. Still, for many taxpayers at average income levels, it amounts to a 28% rebate on the mortgage interest, and any tax relief for the middle class is welcome.

That may soon change, however, as a presidential tax-advisory committee has recently recommended sweeping changes in the Federal tax code in order to simplify the system. One of the suggested changes would be to eliminate the current mortgage interest deduction for primary home loans as well as home equity loans.

The proposed changes would replace the current deduction system with a home credit equal to 15% of interest paid on a principal residence. All deductions for second homes and home equity loans would be eliminated. This is a dramatic change from current law, which allows interest deductions on primary mortgages of up to $1 million and on home equity loans of up to $100,000. Under the new provisions, limits on the 15% credit would be established on a regional basis.

At first, this might seem like a dramatic blow to taxpayers. Is it?

Maybe not. The panel suggests that nationwide, only about 5% of mortgages would be affected. The primary reason for this is that very few taxpayers actually take advantage of the mortgage deduction. For a lot of taxpayers, the standard deduction allowed by the IRS equals their loan interest, and only interest that exceeds the personal deduction is itself deductible. Due to this structure in the code, only about a quarter of all American taxpayers actually deduct their loan interest from their taxable income.

Those hardest hit by these proposed changes would be homeowners who live in California. That state has the highest incidence of high-value mortgages, and homeowners in that state tend to take greater advantage of available tax breaks than those who live elsewhere. It remains to be seen whether the regional limits imposed by the new guidelines would help or hurt California homeowners.

The panel also recommended other changes that would reduce the amount of paperwork required to fill out a tax return. In theory, if all of their suggestions were implemented, the form filled out by the average taxpayer could fit on an index card.

Everyone wants tax relief and everyone wants a simpler, easier tax system. The problem with tax reform is that special interests are affected each and every time a change is made. The ability to simplify the system without hurting the majority of taxpayers is a difficult one, indeed.