Per Simpson-Bowles … go ahead and limit the mortgage interest deduction.

Since I think Simpson-Bowles will be the template for the fiscal cliff resolution, I’ve been thinking about its provisions … starting with taxes (of course).

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Mortgage Interest Deduction

Currently, income tax payers who itemize are allowed to deduct mortgage interest subject to some liberal restrictions:

  • Mortgages for both primary and second homes are allowed up to a combined mortgage balance of $1 million
  • Home equity loans— up to $100,000 are allowed with some restrictions on use of the funds

Simpson-Bowles proposed that:

  • The mortgage deduction be eliminated and replaced by a non-refundable tax credit.
  • The non-refundable credit would be equal to the interest on a primary home mortgage up to $500,000
  • No credit would be provided for interest on second home mortgages and home equity loans

Let’s do an example.

Say somebody is holding $1 million in mortgages carrying a 5% interest rate … annual interest paid = $50,000.

  • Under current tax regs, the $50,000 is tax deductible … so, if the taxpayer is in the 35% bracket, the deduction is worth $17,500 in tax savings.
  • Under Simpson-Bowles, only $500,000 of the mortgage qualifies … the imputed  interest on the $500,000 is $25,000 … so, the tax payer – regardless of his tax bracket would get a $3,000 credit against his taxes (12% times $25,000 = $3,000)

On balance, I side with with Simpson-Bowles on this one.

In fact, I’d probably be even more aggressive and phase the mortgage interest tax advantage out entirely over, say, 10 years.

My basic logic: Why should home owners get a tax break that’s not available to the 35% of people who rent the place where they live?

Said differently, why should renters who pay income taxes subsidize my mortgage?

And, it’s hard to say, with a straight face, that vacation homes deserve a tax break.

So, I say: start the process of eliminating the mortgage interest deduction.

What do you say?

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One Response to “Per Simpson-Bowles … go ahead and limit the mortgage interest deduction.”

  1. Shahed Says:

    I think it is reasonable and necessary, but will be difficult to implement if R’s and D’s don’t go all-in together on it.

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