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Congress Debates Mortgage Interest Deduction

By E Singer
Mar 25th, 2014

mortgage interest deductionHomeowners in the United States have relied on the mortgage interest deduction for many years to save substantial amounts of money off of their federal taxes.

The mortgage interest deduction has been very popular in the general public and has enjoyed support from both political parties. But a new round of budget talks that would include a broad tax overhaul could potentially put this tax deduction into jeopardy. Here is what you need to know.


Why Some Support the Mortgage Interest Deduction

People who support the mortgage interest deduction say that it encourages homeownership and that it gives members of the middle class more financial secularity. One of the effects of the deduction is that it makes mortgage payments more affordable and helps families build up equity in their homes. Last year alone there was approximately $70 billion dollars worth of federal tax deductions that were given out based on the deduction.

It is the largest person tax deduction that an individual or a family can take out. Currently, homes up to $1 million dollars can be used for the deduction. A new proposal lead by Representative Dave Camp (R-Mich) would reduce that amount to $5000,000. As part of the proposal currently held mortgages up to $1 million would be grandfathered in, but the legislation would take effect on new mortgages.

While $500,000 does seem like a lot of money, keep in mind that this would affect certain parts of the country more than others. Traditionally high priced real estate markets on the East Coast and West Coast would feel the greatest impact. California, for example, has an abundance of cities where the median price for a home far exceeds $500,000.

Why Some Oppose the Mortgage Interest Deduction

Those who oppose the mortgage interest deduction say that it mainly benefits those with higher incomes. This is framework in which the compromise legislation from Dave Camp exists in. Data from the congressional budget office reveals that roughly 75% of the 70 billion dollars from the deduction last year go to those who make more than $160,000 dollars each year.

Democrats have argued that that this has done nothing to spur homeownership because those who make $160,000 or more each year are statistically less likely to need money in order to purchase a house. Another criticism is that the deduction does nothing to help the millions of Americans who cannot afford to own a home and are forced to rent.

Much of the debate centers around just what constitutes being wealthy and how much help do the wealthy really need. Does living in a 1 million dollar home make you wealthy? It depends on who you ask, and the way that a person answers will largely depend on their political affiliation. It’s worth keeping in mind though that $1 million doesn’t buy much of home in places like Manhattan and San Francisco. The cost of living in these two cities is exceptionally high.

In addition to these concerns, there is also there is also the fact that the United States remains in a budget deficit. It’s been over a decade since there was budget surplus. What seems likely at this point is that some compromise will be reached that keeps the mortgage interest deduction in place but does significantly lower the amount of money that can be deduced. If a bill similar to David Camp’s proposal gets passed, this will have no effect on current homeowners. But it will certainly be something to keep in mind for those who will be purchasing a house in the future.