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Your Take: Should We Eliminate the Mortgage Tax Deduction?

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Homes!I promised you that we’d discuss the six policies economists love but politicians hate and this week we’ll talk about the first one – Eliminate the mortgage tax deduction. This is what the NPR story said:

Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

I agree and here are my three reasons why.

First, the mortgage deduction is not as much as most people believe it to be. Remember that we each get a standard deduction, $5950 for single and $11900 for married filing jointly, that we are able to claim without paying a penny. So if you were to pay $5950 in mortgage interest as a single filer, you get no benefit from the deduction. Pay $6000 in interest and you get an extra $50 off your taxable income – but you paid $6000 in interest… so you’re still behind. I think you get the idea.

Second, how many people consider the deduction when buying a home? You probably look at your income and try to qualify for a loan. How many buyers adjust their withholding after they buy a house because they know they will claim the deduction? Very few. It’s not part of the decision, the deduction results in a tax break which results in a tax refund the following year. That money is then parsed out to whatever the existing needs are.

Lastly, the deduction is a government subsidy that increases the price of homes. Just as how the Fed’s quantitative easing and loose monetary policy has resulted in lower interest rates (another subsidy that lowers home prices by lowering interest rates), the deduction is fiscal policy that boosts up home prices and rents.

What do you think?

(Photo: wwworks)

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41 Responses to “Your Take: Should We Eliminate the Mortgage Tax Deduction?”

  1. Andy says:

    1. “So if you were to pay $5950 in mortgage interest as a single filer, you get no benefit from the deduction.” That’s assuming you don’t deduct anything else, which if you’re itemizing your tax return already, you’re probably deducting other things as well.

    “Pay $6000 in interest and you get an extra $50 off your taxable income – but you paid $6000 in interest… so you’re still behind.” You’re paying the $6000 in taxes regardless of the deduction, so if I can knock $50 of my taxable income and thus save $12.50, I will, especially if I’m already deducting other things as well. Maybe itemizing just to save $12.50 isn’t worth the time, but if you add up the amount you can save by deducting other things, it might be worth it. Either way, just saying “oh you’ll only save $12.50″ is akin to be “nickeled and dimed”. An extra $50 in taxable income here, an extra $40 in property taxes there, that stuff adds up especially over a lifetime!

    2. “Second, how many people consider the deduction when buying a home?” I’m not sure why that matters. When you find a $10 bill in your coat pocket that’s been there since last year, do you get mad at yourself for realizing you could have put it to use or do you get excited for finding $10? If you consider the deduction when you buy a home, good for you and your forward thinking. If not, you’ll get a few extra bucks back at tax time and be happy about it. People say you gave the government an interest free loan when you get a tax refund, well I’d rather do that than just giving more in taxes.

    3. “Lastly, the deduction is a government subsidy that increases the price of homes.” I just bought a house in May so I definitely don’t want the value of my house to drop if the deduction is taken away. Even if I was grandfathered in and was still able to use the deduction, once houses around me went up for sale, by this logic, they would all be worth less bringing my house value down. Peoples home values have already dropped to normal levels, I don’t think they need to drop more.

    • NateUVM says:

      Okay, yes, people DO get a benefit from having the deduction. But Jim’s point with the items you enumerate was not to argue for the elimination of the credit. It was to show that the impact of it’s being eliminated wasn’t all that bad.

      If it’s been determined that, as a whole, the mortgage deduction might not be all that great for the country, than it might be worth giving up $12.50 in tax return to get rid of it.

      Sometimes it’s about setting aside what might be good for the individual for the sake of what’s good for the country.

      • Andy says:

        “Sometimes it’s about setting aside what might be good for the individual for the sake of what’s good for the country.”

        Raising taxes (or removing a tax deduction) is not always good. This country feels the need to spend every dime it gets, plus money it doesn’t have. Give them money, they’ll find something worthless to spend it on. Give them time, they’ll find some worthless law to create. Until the government can convince me it can be responsible with what it already gets from me, I don’t want to give them more.

        • NateUVM says:

          Well, one of the things the Government is “spending” its money on is the mortgage interest deduction. The discussion we are currently having is whether or not it is worth it.

          If you insist on changing the topic, tell us, then, what we should stop spending money on instead, that is currently so drastically over-funded?

  2. Mike says:

    I don’t think they even allow it to be tax deductible in Canada.

  3. cubiclegeoff says:

    I get a slight benefit because my mortgage interest every year is just above the standard deduction, plus PMI and the local tax deduction put us several thousand above the standard deduction. I never took it into account when we bought our house because it really isn’t that large of a difference.

    I do agree that we should get rid of it though. It’s a regressive tax and doesn’t help most average Americans that much, if at all. It’s mainly a benefit to those that buy expensive houses, and especially those that can afford to pay cash but get a mortgage because of the tax deduction and they know their cash can do better invested elsewhere.

  4. mannymacho says:

    I think the tax deduction should be eliminated, mostly because I am really in favor of simplifying the tax code. I hadn’t thought about it increasing the price of homes but it makes sense.

  5. Texas Wahoo says:

    “First, the mortgage deduction is not as much as most people believe it to be. Remember that we each get a standard deduction, $5950 for single and $11900 for married filing jointly, that we are able to claim without paying a penny. So if you were to pay $5950 in mortgage interest as a single filer, you get no benefit from the deduction.”

    You’re not accounting for all of the other deductions that fill up the standard deduction (particularly state income taxes). We are basically getting the entire deduction, because our other deductions are more than enough to offset the standard deduction (not considing the minimum alternative tax…)

    We definitely considering the home interest deduction when deciding to buy or continue to rent. Our mortage is a bit higher than we were paying in rent (especially when considering property taxes), but that was largely offset by the tax savings because of the interest deduction.

  6. Matt K says:

    isn’t that a contradictory statement?

    if people don’t consider the deduction when buying a home, why would it drive up prices?

    if you actually considered the deduction, only then would it drive up prices….

  7. Dave says:

    As long as people have mortgage debt the deduction is a good idea. Thinking it encourages debt is a false argument. I remember when they eliminated the credit card interest deduction, it didn’t change peoples behavior.
    We need all the deductions we can get. Taxes have to go up to pay the debt. You know it’s going to happen.
    The people that can do without it won’t miss it if it’s eliminated. It’s the people in the middle like me who would see a net increase in taxes payable.
    When the tax code is fair and everyone pays, not just half the population, then put it on the table for review.

    • NateUVM says:

      You can simplify the tax code (thereby reducing administrative expenses both for IRS and for the taxpayer) by eliminating deductions that favor the wealthy (like the mortgage deduction, see article), leaving us able to reduce tax rates while at the same time increasing revenue.

      And while I don’t think (I hope so, anyway) that it impacted our decision in any way, anytime we discussed the size of our mortgage during our home buying process, our broker, lender and attourney all said something to the effect of, “but you will also get to deduct the interest.” So, at least from my experience, the deduction HAS provided upward pressure on debt levels as it HAS been used as an arguement to assume more debt.

      • Tony? says:

        I am not sure I agree with the argument that the tax deduction increases people wanting take on more debt. When you rent or lease a home is that not a legal contract in which you are in debt to? Maybe it’s not I do not really know how these contract are written anymore.

        I think eliminating one tax deduction is far cry from simplifying the tax code and eliminating expenses. This is beside the point though.

  8. Matt K says:

    oh, and when you consider the deduction alone as the ONLY thing you would deduct from your taxes, it doesn’t seem like much, but you can’t do that. in reality, I think people would have more deductions than JUST the home. all those deductions add up, and without that mortgage interest deduction, those other deductions may not give a good tax relief, so side effects like charitable giving could go down.

  9. Azzurri17 says:

    I find your example of the minimal benefit of the mortgage interest tax deduction to be a bit misleading. While what you have written is absolutely true, if you have mortgage interest to deduct, you will also have property tax to deduct. This then puts you past the standard deduction and will then open you up to claim other itemized deductions.

    I go back-and-forth regarding if it should be eliminated or not. It is one of the few benefits for those that are currently in mortgages that far exceed the value of their home. What do you think would happen if you told them that they could no longer deduct the interest on their mortgage payment? I bet a lot of people stop paying.

    On a completely unrelated note, Jim, I love to read your blog and do so daily. It is the first thing that I read every morning!

  10. R Price says:

    The mortgage interest deduction is one of the most regressive tax deductions in the tax code – meaning that it favors mostly the rich (actually anyone) who have large loans (and large interest payments). I am in favor of eliminating the dollar-for-dollar tax deduction, and, instead, going to an across the board tax credit (say a $1500 credit) for home ownership. This credit could only be taken for a maximum of 10 years.

  11. Jared says:

    Everyone considers their deduction when taking out a mortage–at least, their banks do. It used to be that the debt-to-income ratio was capped at 30%, after which you could not qualify for a loan. Then, some number of years ago, they increased that to 44%. So many people with new mortgages, many of which might even be up-side-down, are paying 44% of their gross income to their mortgage payment. This only balances as they are paying a smaller percentage in federal and state income tax. Without that deduction, many people would loose their homes.

    No doubt, however, that it is really a bank subsidy, and it was a rotten idea to begin with. But, unfortunately, for the immediate future, we are probably stuck with it. (Unless we could mandate lower interest rates for all existing mortgages to make up for the difference.)

  12. Robert says:

    Only get rid if it as part of a comprehensive tax system overhaul where everyone pays the same rate.
    Yes I am talking about a Fair Tax system, where all people contribute to our nation. It will engage more people in the conversation and have the same effect on everyone when politicians talk about tax increases. How about 10% for everyone. The first $50,000 is excluded so as not to affect the poor and lower-middle class.

    The rich will pay more because they make more. The more you make the more you pay although the rate never increases. People always talking about The Rich (note, I am not rich), paying their fair share. I thought we are all “equal”? Why should anyone else have to pay more (or less) than any other citizen? Is that Justice?? I think Not!!

  13. Steve says:

    Tax deductions are provided to encourage certain types of spending, I’m not sure what overall benefit the mortgage tax deduction provides. So conceptually I might be in favor of repealing it. I don’t know that in our modern society more home ownership vs. renting makes much of a difference.

    But practically speaking, the benefit can be a lot bigger than your example (as many have pointed out), and people have budgeted for home purchases with the deduction in mind. If they repeal it I think it must be done in some sort of gradual manner (say deciding now to eliminate it 5 years from now), so home owners and home buyers can plan for what can be a pretty significant change.

    Also, now might not be the best time to repeal the mortgage tax deduction, considering the state of the real estate market. I understand this argument can be a slippery slope (like the Bush tax cuts, when is ever a good time to repeal them?)

  14. They way our tax system is set up, you want to look for deductions. Closing this type of deduction down might have some serious impact on the average homeowner. For example, they might need the mortgage deduction coupled with the property tax deduction to open themselves up to itemize other deductions. As a stand alone deduction it might not make sense…but the mortgage deduction is only one aspect of someone’s financial circumstance. And we just can’t speak for all.

    Depending on one’s circumstances the mortgage deduction may not be beneficial for them anyways and that’s when we get into should you pay off the house or not.

    Since our tax system isn’t simple, the question you bring up about mortgage deduction can’t warrant a simple answer. It’s all tied together.

    • I would like to get rid of all tax deductions period. Who are the people taking advantage of these deductions?

      • Azzurri17 says:

        As you can see from the comments, there are many people are taking advantage of this one particular deduction so it stands to reason that there are many more people taking advantage of other deductions that the code allows them to.

      • Fabclimber says:

        Almost all tax deductions are in the code to either subsidize (pay back) a special interest group for political contributions or for the purpose of social engineering. Very few stimulate overall productivity which grows the economy.
        I agree. Get rid of them all.

  15. Hey I’m glad you pointed this point out! I wrote an article on it last week. I think the main thing is realtors and people in the industry always tell buyers how much they’ll save when they buy a house on their taxes. This is the part that’s false so I think people do take this into account.

    They might not crunch the numbers, but they may consider it subconsciously.

  16. Dan says:

    I disagree. We just bought a house and we definitely took the deduction into account. Our state taxes were already more than the standard deduction. Deducting interest and property taxes is saving us about 700 bucks per month, and we probably would not have bought this house without that.

  17. Megan E. says:

    Personally, I’d like to see all deductions eliminated. And all “allowances”, “exemptions”, etc. It’s way too complicated right now.

    Instead, we should go to a flat tax for individuals – something like:

    $0-12,000 – 0%
    $12,001-36,000 – 8%
    36,001-$72,000 – 12%
    72,001-120,000 – 15%
    120,001-180,000 – 18% (*if you live in a state with a COL => 200% of the median, you get 1.5% reduction – while I realize this isn’t strictly flat, it is fair)
    180,001-$250,000 – 22% (*again, same as above)
    $250,001-$350,000 – 25%
    $350,001+ – 27%

    In addition, EVERYONE would pay 2% for national health and 3% to social security.

    That’s it – a tiny change for high cost of living areas, otherwise it would be so much easier as above. No “child credit”, no “house credit”, no “student loan credit”. Lower rates across the board but no other crazy stuff.

    • NateUVM says:

      This isn’t a flat tax. This is a graduated tax, just like our current system (although, to be clear, you haven’t mentioned whether or not these are nominal rates, or not).

      What’s interesting is that you state, as a goal, that you want to eliminate allowances and deductions, but then suggest an allowance for living in a state that has greater than 200% of the median cost of living under the guise that it is “fair.”

  18. eric says:

    I’m with you Jim. I doubt it would ever happen without people spilling tears though.

  19. NCN says:

    I like @Megan E’s idea for a fair / flat tax.

  20. MrCoffeecup says:

    Jim and friends: I can’t believe that your fall for this proposal that the Government is here to help you! Right.
    The very reason for the mortgage interest deduction was instituted was to lower the income available for a tax. Your figures are misleading and the proposal has not alternative suggestions.

    Since when do you actually believe that the government will be doing you a favor by eliminating the mortgage deduction. Flat, splat taxes are bogus. It truly hurts the lower income levels where a family of four earning $40k per year pays a flat tax of $4800.00 in taxes. After the 2008 melt down, all middle income jobs were crashed. Take a good look at the foreclosure markets today. Does this mean no sales taxes, no fees, no food or med taxes in lieu of flat tax proposals? “I don’t think so Tim” as they said on TV.

    All of those great college educated grads, w/years of experience, now working a Wally Mart, Starcups, plus three other part time scenarios just to keep fuel in the auto. That’s the proof that a flat tax is bogus and not helpful. Wait until someone in the government suggests we add $1.10 increase in the federal tax on a gallon of gasoline. Watch the economy tank then !

    Canada, a socialists state,has for years eliminated mortgage interest deductions; have struggled with other VatTax problems plus $ 8.50 CD for a gallon of 87 octane fuel. Its just the tip of the iceberg of problems when this tax deduction is eliminated.

    Retirees, will be hurt while living on their limited incomes. Tax rates are going up, Social Security Medicare Insurance is going to cost more in 2014 (double what I’m paying now) with less benefits. But wait there’s more, I paid for these benefits in cash over the last 35 years. It’s not an entitlement!

    A flat tax only benefits people who are fortunate to earn over 100K. And remember, no other deductions could be taken. There goes the entrepreneurial spirit especially if your income is derived from self employment.

    Spending by the Federal Government is the gorilla in the room that just doesn’t seem to be understood. We could keep the current tax code and ad more exemptions if we cut our total spending by 4% a year for the next 5 years. Our economy would rebound giving back those jobs lost to the East.

    Like the person from the Federal Budget Office says: “Trust Me, I’m here to Help You! “

  21. My mortgage interest is too small to qualify because I don’t have enough other stuff to itemize. I guess this classifies as a good problem to have despite the fact I don’t get a tax break. Take it away, it won’t affect me, keep it and I might take advantage one day long down the road.

    • Shirley says:

      I have to agree with you. Then I think, “It will never affect me, but what about my grandkids and so on?”

  22. Jim M says:

    While I am all for reforming the current ta code – it should be done as a sweeping reform – not by eliminating deductions here and there. That is how we got in this mess in the first place.

    The most important thing we need to do is to enlarge the proportion of people who actually pay.

  23. I don’t know after reading your comments, but usually our mortgage payments were $2200 with $1700 interest, and that tax relief really helped when it came. When you talk about $6000 in interest, you’re only talking about $500 a month in interest. That’s a very low payment for a home. I guess I think maybe you’re slanting your question to get the answer you want to hear. So, I’d have to say again, I don’t know — but it sure helped us.

    • Fishy says:

      A 2200 a month mortgage 1700 a month interest?

      I assume you mean that for every 2200 you pay you reduce principle by 500.00.

      a). That 1700.00 is not all interest. It pays interest and Escrow (property taxes, insurance, etc.).

      b). You are reducing principle 6k per year. Every year you remain in the home with the same mortgage and make payments, the amount going to principle increases and the amount going to interest decreases.

      c). Home loans are amortized over the life of the loan (let’s say 30 years). Eventually, the amount of your payment going to principle will be more than the amount going to interest. Refinance for a lower rate and payment and don’t shorten the term or make the same payments and you may just end up paying even more interest (in the long run).

  24. Megan, what you suggest is appropriate, but isn’t a flat tax. Flat taxes mean the same tax for everyone, regardless of income. Flat taxes are regressive taxes. On the surface they sound good, but when you consider that poorer people have to pay a larger portion of their income with a flat tax, it isn’t fair. For taxes to be “equal” for everyone, they must be compared to the person’s income, as you suggest. So a higher income family should pay a higher percentage of their income for national health and social security. I sure like the idea of national health. In the US we only have rescue medicine, not health care.

    • Fishy says:

      Which is by definition “not a flat tax”. It’s the same old graduated tax system.

      >>So a higher income family should pay a higher >>percentage of their income for national health >>and social security.

      Hogwash. And you forgot National Defense and research. And you must have forgotten that the higher income family already does pay more for HealthCare (Medicare) and Social Security.

      National Healthcare is a fine goal. But, everyone must make the sacrifices necessary to obtain it.

      Same goes for education.

  25. Seth says:

    I guess it could possibly have an added benefit of giving some people the extra nudge they need to finally pay more toward their principal to bring down the balance (and consequently the interest paid). Sure, the low interest rates will still keep many from doing that, but some use the deduction as part of their argument for keeping a mortgage.

    • Fishy says:

      If the interest deduction is so great, I would expect to see more people refinancing to a higher interest rate, but that isn’t happening for good reason.

      The interest deduction has value early on, but less so as you pay down the debt.

      Sooner or later, you either pay off the mortgage or you rent, or you downsize.

      Downsizing is fine, but only if you can cash out of your house and pay cash for something smaller. Nobody wants a mortgage payment in their golden years.

      If you rent, then removing the interest deduction may sound like a good idea (since you don’t have it and let’s stick it to the landlord). But your rent will increase to cover the lost deduction.

      The biggest mistake people make is refinancing whenever the rates drop, to a lower rate and the same term. Refinancing when the rates drop enough is smart. Refinancing to the same term as the existing mortgage, 5-10 years into a mortgage is foolish. Refinance to a shorter term and/or refinance to a lower rate, but make the same payments as you made with the higher rate.


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