Revising the bill for the mortgage-interest deduction
Congress’ own data crunchers say the homeowner tax break is less of a revenue hit than previously thought
In the contentious debate over whether to reduce or eliminate the home mortgage-interest tax deduction — or leave it alone — one fact has been virtually unchallenged: The popular write-off used by millions of U.S. homeowners costs the government massive amounts of revenue, somewhere in the range of $100 billion a year.
This adds to the federal deficit and debt, and has ranked the deduction high on the hit list of most tax reformers’ agendas, including the bipartisan Simpson-Bowles deficit commission’s plan. President Obama himself called for limiting it throughout his first term in office, and ran on a platform to pare down its costs in his re-election campaign. The compromise Congressional tax package that ended the “fiscal cliff” crisis Jan. 2 also contained a limitation on the mortgage write-off, targeted at high-income taxpayers.
But hold on. How much does allowing owners to deduct the interest they pay on their home loans really cost the government? Congress’ technical experts on the subject have come up with new estimates that should figure into Congressional deliberations expected later this year on overhauling the federal tax code. Their findings: The mortgage write-off costs tens of billions of dollars less than the government previously believed.
One day after the Internal Revenue Service released its latest instructions for homeowners on claiming the mortgage-interest write-off for the upcoming tax season, the nonpartisan Joint Committee on Taxation published revised estimates indicating that because of changes in the economy and tax legislation, the cost of the deduction for fiscal 2013 will be $69.7 billion.
That’s a dramatic reduction from the committee’s own earlier numbers. In a projection released in January 2010, it said the cost of the mortgage write-off in fiscal 2013 would hit an all-time high of $134.7 billion. Under the revised estimates, costs will slowly rise into the $70 billion-plus range over the coming several years and will only exceed $80 billion in fiscal 2017, when they hit $83.4 billion.
Sure, these are all eye-glazing, monstrous numbers. And there’s no question that mortgage write-offs can be criticized for being skewed toward wealthier owners, especially in higher-cost markets on the West and East Coasts.
But the fact remains: There’s less fiscal meat here than previously advertised. The write-off is still a large and vulnerable target, but it’s not as costly as widely portrayed. You could even argue that if Congressional tax reformers are looking for reductions in projected “tax expenditures” to reduce deficits, they just got a nice chunk via the revised estimates from the Joint Tax Committee, their own in-house technicians.
The same committee also just lowered its earlier estimates on local property tax write-offs by homeowners. Rather than the $30 billion cost for fiscal 2013 projected back in 2010, the updated estimate is now $27 billion. The only significant increase in the revised projections: Thanks in part to improvements in the housing market, capital gains exclusions — the $250,000 and $500,000 amounts that single and joint-filing homeowners respectively get to pocket tax-free on profits when they sell their primary homes — will cost the Treasury $23.8 billion in 2013, rather than the $19.8 billion estimated in 2010. In the curious world of tax subsidies, good news — in this case, home values — costs the government more.
Meanwhile, the IRS has released its latest instructions for owners seeking to take the mortgage-interest deduction in the coming tax-filing season. Among some noteworthy points:
Thanks to the fiscal cliff tax bill, mortgage insurance premiums, including those paid on conventional low-down-payment loans, FHA premiums, VA funding fees and Rural Housing Service guarantee fees, are deductible for tax year 2012. But note the income limitations: Once your adjusted gross income exceeds $100,000 ($50,000 if you’re filing singly), your write offs are subject to a phase-down schedule that reduces the deduction to zero above $109,000 ($54,500 for singles).
The federal tax code contains a variety of restrictions — some of them complex — on whether and how much mortgage interest you can write off. For example, if you’ve got an office in the home, rent out a portion of your house, rent out your second home for significant periods of time during the year, or paid “points” on a new mortgage or refinancing last year, there are special rules you need to know. The best way to get up to speed on how they might affect you is to download the IRS’ latest guidance on the mortgage interest deduction, Publication 936, 2012 revised edition, at the agency’s website.
Kenneth R. Harney is a syndicated real estate columnist