Under the current tax law, homeowners are allowed a deduction for mortgage interest paid. The deduction is generally allowed for interest paid on mortgage debt of up to $1 million, and is available for interest on mortgages for a principal residence and one additional residence. The $1 million limitation represents the combined allowable debt on two residences. Mortgage interest on up to $100,000 of debt on home equity loans or lines of credit also qualifies for the deduction.
As part of its budgets for the past several years, the Obama Administration has proposed reducing the value of all itemized deductions (including the mortgage interest deduction (MID)) for higher-income taxpayers. This would be done by limiting the value of itemized deductions to 28 percent for taxpayers who are in tax brackets higher than 28 percent. Thus, individuals who are in the 33 percent, 35 percent, or the new 39.6 percent tax brackets would find their itemized deductions worth less under this proposal. In other words, an individual in the 35 percent tax bracket currently gets 35 cents on the dollar benefit of a deduction, where under the proposal, the deduction would be worth only 28 cents on the dollar.
In December 2010, the President’s Commission on Fiscal Responsibility and Reform (the Deficit Commission) released a host of deficit reduction and tax reform proposals. These recommendations included:
- Repeal MID in favor or lower tax rates
- Reduce the $1 million cap to $500,000
- Eliminate the deduction for second homes
- Convert the deduction to a 12 percent tax credit.
The mortgage interest deduction is a remarkably effective tool that facilitates homeownership. While only about 30 percent to 35 percent of all taxpayers in any given year itemize their deductions, more than 70 percent of homeowners utilize the deduction over the period they own their home.