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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