Fiscal Cliff: Mortgage Interest Tax Deduction at Risk

by 16 Nov 2012

Of all the tax breaks and deductions that could come to an end due to the upcoming fiscal cliff in 2013, the mortgage interest tax deduction is considered one of the most problematic. Of all the Bush-era tax cuts, the mortgage interest tax deduction is the one most commonly taken advantage of by middle-class homeowners who carry a mortgage on their primary residence. Should the fiscal cliff do away with this tax deduction, some observers and analysts think it could have a chilling effect on the recovery of the housing market. 

Why the Mortgage Interest Tax Deduction Should Continue

Of all the deductions related to housing in the U.S. tax code, the mortgage interest subsidy is the most generous. This deduction, along with the first-time home buyer tax credit of 2008-2009, has been an important factor in the economic recovery of the American housing market. Real estate agents, attorneys, mortgage brokers, accountants, and financial planners often remind their clients about the benefits of the mortgage interest tax deduction when purchasing a home.

Taxpayers who earn between $40,000 and $250,000 a year stand to claim itemized mortgage interest deductions of up to $2,600 a year. Higher income households that bring in more than $250,000 per year can pocket $5,400 on average each year thanks to this deduction. Judging by these figures, the deduction is more than just an incentive; it can be considered a stimulus for the housing market. 

Proposed Alternatives

Legislators who argue that the Bush tax cuts have gone on for too long are offering proposals for keeping the mortgage interest tax deduction to a certain extent. One proposal calls for limiting the deduction to only the first $500,000 of the property value. Another proposal looks at the mortgage interest amount and caps the deduction at $25,000. An alternative to this proposal is to make it available only to those taxpayers who earn less than $250,000 a year; this proposal is a favorite of former presidential candidate Mitt Romney. 

If none of the proposals are accepted by Congress and the White House, the mortgage interest tax deduction would be the greatest casualty of the fiscal cliff, and it would deal a major debilitating blow to the housing recovery.

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