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.
To date, limits on itemized deductions have not been part of the legislative agenda, though many in Congress say that "everything is on the table." However, House Ways & Means Committee Chairman Dave Camp (R-MI) released a draft tax reform plan that would drastically reduce the benefit of the MID. Specifically, the proposal would lower the cap on the size of mortgage loans for which the interest is deductible from the current level of $1 million to $500,000 in four steps. But much more significantly, the proposal would also reduce the number of taxpayers eligible to claim the MID from around 33-35% today to an estimated 4-5%.
The Camp plan is a discussion draft only, and the political and legislative environment this year makes it unlikely that this or any other tax reform plan will move before the end of 2014. Also, Chairman Camp has announced his retirement from the House at the end of 2014. Thus, the Camp draft as released is not going to be a factor in 2015 and beyond. However, many of the ideas of this draft plan might be resurrected by other policymakers in future years, including this drastic change to the MID.
REALTORS® can expect the MID to be under continuing attack and scrutiny as the Nation moves through the difficult fiscal environment.