Homeowner deductions could be at risk - PeachParts Mercedes-Benz Forum

link · #1 03-07-2009, 11:21 AM

By Kenneth R. Harney
Syndicated Columnist

WASHINGTON — Call it the third rail of the federal tax system: the politically untouchable cluster of special benefits and subsidies set aside exclusively for homeowners, including deductions for mortgage interest, local property taxes and capital-gains exclusions on up to $500,000 in sale profits.

Is the Obama administration serious about beginning to clamp limits on at least some of these subsidies? The administration isn't commenting on anything beyond what was proposed in its first budget submitted Feb. 26, but housing and banking trade groups are worried the initial proposal to cut back on the ability of upper-income families to write off mortgage interest and other expenses is just the opening move in a long-range effort to alter the federal tax code.

They also argue that since tax subsidies are now embedded in home prices in most segments of the market — not just the upper end — removing them even partially would cause housing values to drop across the spectrum.

What should homeowners make of all this? Is there a real possibility that Congress would take away tax breaks that millions of people have come to consider an essential part of the home-buying equation? Here's a quick overview of the issue:

What did the Obama budget propose specifically on mortgage-interest and property-tax deductions?

Starting in 2011, home-owning households with adjusted gross incomes of $250,000 and above could only take write-offs at a 28 percent marginal tax-bracket rate. To illustrate, say you're in the 35 percent bracket and have $20,000 of mortgage interest, property tax and charitable deductions, all of which are targeted in the Obama proposal. This year you'd be able to write off 35 percent of the $20,000 — $7,000. If you were capped at a 28 percent rate, you could only write off $5,600. Your tax bill would go up by $1,400.

Why cut these deductions?

Very simply — to raise tax revenues so the government can spend the money elsewhere, such as for health care. Mortgage interest and property-tax write-offs cost the Treasury massive amounts annually. In a report last October, the bipartisan congressional Joint Committee on Taxation estimated that in 2009, the mortgage-interest deduction alone would cost the government $89.4 billion in uncollected taxes. Between 2008 and 2012, according to the committee, the interest write-off in its current form will cost the Treasury $443.6 billion. Property-tax deductions will cost another $112 billion over the same period.

What impact might these — and possibly further-reaching future changes — have on the housing market?

Home-building, realty-brokerage and banking-industry leaders passionately oppose the deduction cutbacks because they think they could lower property values and are ill-timed in terms of the vulnerable state of the market.

John Courson, president of the Mortgage Bankers Association, says even two years in advance of the actual starting date of the Obama plan, buyers will start "pricing in" the lower tax benefits — discounting what they are willing to pay for a house given lower future deductions.

Joe Robson, chairman of the National Association of Home Builders, said "financing health-care reforms by chipping away at the mortgage interest and real-estate tax deductions ... will only hurt the ailing housing market and U.S. economy."

No trade group has offered specific projections of price or sales reductions attributable to the cutbacks, however.

Is there a longer-range plan here?

Obama himself has not referred to a broader agenda, but some of his top economic advisers have advocated major reforms of the federal tax system.

For example, his budget director, Peter Orszag, is on record favoring scrapping current tax-deduction incentives and replacing them with a system of "refundable tax credits."

The credits would provide the identical dollar amounts to homeowners at all income and price brackets. The advantage of a uniform approach, Orszag argued in a 2006 paper for the Brookings Institution, is that it is usable by lower-income and higher-income taxpayers alike, whether they itemize or not. The credits would be "refundable" in that households who pay little or no income taxes could receive them as income supplements.

Could Congress agree with this year's budget proposals on tax write-offs?

Given how deeply rooted the write-offs are in politics and the economy — plus the fragile state of housing — the odds would appear to be against it. But Obama is at the height of his game, and needs to come up with revenue to pay for health-care changes from somewhere. So don't count him out.

Botnst · #2 03-07-2009, 11:22 AM

I favor removing homeowner's deduction. Along with all other deductions.

MTUpower · #3 03-07-2009, 11:44 AM

Quote:

Originally Posted by Botnst

I favor removing homeowner's deduction. Along with all other deductions.

I favor helping take care of others as long as they attempt to realistically take care of themselves. If not then when they fall down the gov should not spread the skinned knees to everyone else. Too many people in the USA think that there is no futurity in their actions, and expect to have a lifestyle well beyond the means of those actions or inactions.

kerry · #4 03-07-2009, 12:18 PM

Kind of off topic, but am I right in thinking that one cause of the current foreclosure crisis was the abolishing of deductions for interest on credit cards and other loans a decade or so ago? People began taking out home equity loans in place of other loans without deductability, putting their homes at risk? I haven't seen any data on foreclosure rates before and after that change.

Jim B. · #5 03-07-2009, 12:46 PM

What is wrong with NO deductions for anything and a simple 15% tax across the board?

Why not gore everyone's sacred cows, simplify everything, including eliminating the mortgage tax deduction that pits mortgage payers vs. renters and people that don't have mortgages on their house?

I despise both the idiots that boght houses they can not afford and also, the mortgage brokers that conned them into buying them just for the sake of a comission, and the cunning greedheads that bundled "bad" mortgages with "good ones" and peddled them away as "good" ones.

Plenty of blame to go around, and not enough accountability as we all reap the whirlwind.

dynalow · #6 03-07-2009, 01:04 PM

Quote:

Originally Posted by kerry

Kind of off topic, but am I right in thinking that one cause of the current foreclosure crisis was the abolishing of deductions for interest on credit cards and other loans a decade or so ago? People began taking out home equity loans in place of other loans without deductability, putting their homes at risk? I haven't seen any data on foreclosure rates before and after that change.

I'm sure it has contributed to it. My guess though, it is only to a small degree. No doubt. It lowers your after-tax borrowing cost. Problem is, that few folks then repay the car loan at amounts equivalent to a 3 or 5 year amortization. Hey, minimum payments baby!

A lot of what's being deducted as home mortgage interest isn't really deductible..and the IRS is looking into it.

Back to the point of the post. I don't think this deduction cap for high income taxpayers will fly. Too much at risk right now. It would have some negative impact on housing prices. The housing lobby & trade groups are influential.
Until housing rebounds, the ecomomic recovery will lag. And that, in my opinion, is at least three years off.

Charities are very upset about it too, claiming they will see a drop off in donations as a result.

Raise rates for more revenue. But that takes courage.

But, the deduction for personal interest (cc, auto loans, etc) went away in 1986. Different times.

Botnst · #7 03-07-2009, 01:15 PM

Quote:

Originally Posted by Jim B.

What is wrong with NO deductions for anything and a simple 15% tax across the board?

Why not gore everyone's sacred cows, simplify everything, including eliminating the mortgage tax deduction that pits mortgage payers vs. renters and people that don't have mortgages on their house?

I despise both the idiots that boght houses they can not afford and also, the mortgage brokers that conned them into buying them just for the sake of a comission, and the cunning greedheads that bundled "bad" mortgages with "good ones" and peddled them away as "good" ones.

Plenty of blame to go around, and not enough accountability as we all reap the whirlwind.

Jim B for president. Sign-up early.

Hatterasguy · #8 03-07-2009, 01:34 PM

He sure seems hell bound to kill whats left of the economy. Change is really all were going to have left after Obama's government spends us broke.

iwrock · #9 03-07-2009, 01:59 PM

Hatterasguy · #10 03-07-2009, 02:04 PM

Thats all that I have left!

iwrock · #11 03-07-2009, 02:07 PM

Thats all I am going to have when this whole thing is over.

Hatterasguy · #12 03-07-2009, 02:32 PM

How is this?

raymr · #13 03-07-2009, 03:09 PM

Yes. Why should I help pay for anyone's Jumbo mortgage. Pay for your house your own damn self. Same for all the other deductions. The only deduction we don't have is the one that makes sense. That's a savings and investments deduction, ie, any money you put into a savings account gets untaxed. When you take it out, it becomes taxable income again.