Mortgage deduction: America’s costliest tax break
NEW YORK (CNNMoney.com) — The mortgage-interest deduction is America’s favorite tax break — and it’s also the costliest.
Between 2009 and 2013, the government will lose out on nearly $600 billion because of it, according to the Joint Committee on Taxation.
While there’s no way to stabilize U.S. debt without making tough choices on the tax and spending sides of the ledger, some sacred cows are more sacred than others. And the mortgage-interest tax break is still deemed untouchable.
Case in point: a new bipartisan tax reform proposal that has been gaining currency in policy circles. Co-sponsored by Sens. Ron Wyden, D-Ore. and Judd Gregg, R-NH, the proposal would simplify the income tax system, streamline the numbers of credits and deductions, and lower the corporate tax rate.
But it doesn’t touch the mortgage deduction.
“We wanted a politically viable vehicle,” Gregg said at the Heritage Foundation last month.
Currently, individuals owning a first or second home can deduct the interest on up to $1 million in loans used to buy, build or improve the home. They can also deduct the interest on an additional $100,000 on loans secured using the home as collateral, regardless of how the money is used.
Many policy experts have proposed modifying the interest deduction for three reasons: It takes a big bite out of federal coffers; it favors higher-income tax filers; and it distorts investment decisions.
And while the deduction is seen as a big spur to housing sales, which in turn can bolster big swaths of the economy, some think the generous deduction may have contributed to an unstable rise in home prices.
Of those who had mortgages in 2008, roughly 72% claimed the mortgage deduction. But those who benefited most were higher-income households, according to the Joint Committee on Taxation.
Almost half of the returns claiming the deduction were from filers with incomes over $100,000, and roughly 75% in foregone revenue that year went to them.
Meanwhile, 32% of the money went to households with incomes over $200,000, even though they accounted for only 11% of the returns claiming the deduction.
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Mortgage deduction: America’s costliest tax break
