Obama Proposes Reduction to Mortgage Interest Deduction

February 15, 2011 (Chris Moore)
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One of President Obama’s Deficit Reduction Commission’s recommendations appears to have hit home. Normally considered to be a “sacred cow” and expected to be furiously fought by the housing and building industry, the President has proposed a reduction in the mortgage interest deduction for high income taxpayers in his 2012 budget.

The proposed budget would reduce by 30 percent the amount that high earners can save on their federal tax bill by claiming itemized deductions, such as for mortgage interest, charitable giving and state and local taxes. Such taxpayers would see their tax savings limited to 28 percent of their itemized deductions, down from 39.6 percent currently.

The rule change would apply to couples with annual incomes of $250,000 or more, or single taxpayers with incomes of $200,000 and above.

Currently, interest on a mortgage taken out to buy or improve a home can be fully deducted if the amount of the loan is less than $1 million for married couples and $500,000 for singles. Home equity loans taken out for anything else is limited to $100,000 for couples and $50,000 for singles.

Advocates of the housing and building industry including the National Association of Realtors (NAR), the National Association of Home Builders (NAHB), and the Mortgage Bankers Association (MBA) have all previously attacked the Deficit Reduction Commission’s proposal when it was released last December.

“The tax deductibility of interest paid on mortgages is a powerful incentive for homeownership and has been one of the simplest provisions in the federal tax code for more than 80 years,” said NAR President Ron Phipps at the time.

The proposal also faces an uncertain future in Congress, which rejected a similar proposal last year, when Democrats had the majority.

Under the proposal, a high-earning couple with a $500,000 mortgage at a 5.5 percent interest rate would see their taxes increased by about $2,900 a year, assuming roughly $25,000 in interest paid. Such a family can currently save up to $9,800 with a 39.6 percent deduction, falling to about $6,900 with a 28 percent limit.

Tags: mortgage interest deduction, high income taxpayers, mortgage interest, itemizaed deductions, nar, nahb, mba, deficit reduction commission