Change on the Homefront

Possible Reform Of U.S. Mortgage Interest Deduction Into Tax Credit

If there is anything that keeps Americans on their toes, it’s change. A total tax reform on the U.S. tax code is a hot topic for 2013 with talk about altering the mortgage interest deduction that costs the federal government at least $70 billion a year.

According to the Internal Revenue Code, the U.S. currently allows a home mortgage interest deduction, meaning it allows home-owning taxpayers to reduce their taxable income by the amount of interest paid on their loan. While intended to encourage homeownership, the deduction is highly geared towards Americans who need little assistance affording a home rather than helping the struggling homeowners.

The Center on Budget and Policy Priorities (CPBB) said in 2012, 77 percent of the benefits went to homeowners with incomes above $100,000, while middle- and lower-income families receive little to no benefit from the deduction.

Recent proposals offer the idea of converting the deduction into a tax credit for mortgage interest.

“A tax credit is a much fairer way to help homeowners, especially those that need it, like lower income families,” said Will Fischer, a senior policy analyst at The CPBB.

While it is one of the largest expenditures in the tax code and its removal could help the U.S. budget, some still fear taking it away would harm the economy and reverse the slowly recovering housing market.

“Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented,” said the National Association of Realtors.

This in turn could slow the housing market and increase the numbers of renters than homeowners due to buyers knowing ahead of time that they won’t get that benefit each year.

Things are still up in the air right now, but we can expect to see some movement with the tax code soon.

House Ways and Means Committee Chairman Dave Camp (R-Mich.) said he would like to see a total tax reform package before the end of 2013.

Those trying to change the mortgage deduction will not find it easy, but many hearings are scheduled through summer and fall to get things moving.

“You can’t say for sure what will happen in Congress, but I think there’s a lot of momentum to finally change the mortgage interest deduction,” said Fischer.

David A. Scotch P.C., CPA