Recent talk about eliminating the mortgage interest tax deduction has made headlines and, given all of the proposed changes, has caused confusion for many.  Below is an explanation of what the mortgage interest deduction is in its current form and the proposed changes being suggested by The National Commission on Fiscal Responsibility and Reform in an effort to reduce the national deficit.

How the mortgage interest tax deduction works today:

Currently the monthly interest paid on your mortgage is considered a tax deductible expense, meaning you can take the amount you paid in mortgage interest throughout the year and deduct it from your taxable income–but only if you itemize your taxes, something only about one-third of Americans do each year. This is not to be confused with a tax credit, which reduces the amount of tax you pay. The first-time home buyer tax credit is an example of a tax credit. For example, if you owed $10,000 in taxes in 2010 but were able to claim the full, first-time home buyer tax credit of $8,000, the amount of taxes you would owe would go down to $2,000.

Mortgage interest can only be deducted for your primary and secondary homes. Interest paid on third or fourth homes is not tax-deductible. The amount of mortgage interest paid can be found on your 1098 Mortgage Interest Statement from your bank. Should you decide to itemize your taxes for deductions rather than take the standard deduction, you will be asked to provide your 1098 Mortgage Interest Statement to your tax preparer. According to Investopedia, only taxpayers whose total itemized deductions are greater than the standard deduction will itemize their taxes. As a rule of thumb, if the amount of mortgage interest and points paid during 2010 exceeds the standard deduction ($5,700 for single taxpayers, $11,400 for married taxpayers filing jointly, $8,400 for head of household) you will likely benefit by itemizing your deductions.

As a side note, Primary Mortgage Insurance paid in 2010 is also fully tax deductible for taxpayers whose adjusted gross income (taxable income) falls below $100,000 and is partially deductible for those with taxable income between $100,000 and $109,000.

Proposed changes to the mortgage interest tax deduction:

The National Commission on Fiscal Responsibility and Reform is proposing a change to the current tax deduction that would modify what is eligible, not eliminate the deduction altogether. The proposal eliminates the tax deduction for secondary homes, homes with mortgages exceeding $500,000 and mortgage interest on home equity loans. The majority of American homeowners who have primary home mortgages of less than $500,000 would not directly feel the affect the impact of the proposed mortgage interest tax-deduction changes.

Arguments for and against proposed mortgage interest tax deduction modifications:

Proponents have come out in droves both for and against the proposed changes. According to a recent Los Angeles Times article, the National Association of Realtors is currently running ads, “warning that tampering with the deduction would hurt “hard-working American families.” The ads point out that 65% of the taxpayers who took the deduction made less than $100,000.”

However, the article goes on to say,

What the group doesn’t say is that about 75% of the entire $85.5 billion that people saved in taxes from the mortgage interest deduction in 2008 went to individuals or couples making $100,000 or more, according to an analysis by the congressional Joint Committee on Taxation of the latest data available.

Based on the committee’s numbers, taxpayers who took the mortgage deduction saved, on average, $2,330 in 2008. But for those reporting incomes of $200,000 and more, the average savings were nearly triple that amount.

About half of all homeowners in the U.S. — and just a quarter of all taxpayers — benefit from the mortgage interest deduction at all. That’s because most people don’t have home loans or don’t pay enough in mortgage interest to take advantage of the benefit.

Here are a few good articles with expert commentary about the pros and cons of modifying the mortgage interest tax deduction from its current form:

Wall Street Journal: Homeowner Perks Under Fire

Los Angeles Times: Tax Deduction for Mortgage Interest Could be on the Chopping Block

AOL HousingWatch: Mortgage Interest Deduction: Do You Need It?

About the Author

Alison writes about rental and mortgage market trends for Zillow Blog.

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  • Mr Bubble

    This will completely collapse prices in the high tax, high real estate value states. Ahh, I mean collapse further.

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  • leaderscorp

    Well it’s obvious that all the new laws, rules and regulation is structured and developed to the benefit of 2 parties, the client which is noble and letting only the big banks take over the mortgage industry. Well the question that rise, how will the mortgage bankers / correspondent lenders pay their loan officers more then what bank of America, Wells Fargo, Chase pay their loan officers and stay competitive with the big banks?

    The answer to that is something that lot of people are waiting for, and besides that everyone is anxious to see how things is going to fall in place, knowing that mortgage brokers and mortgage bankers loan officers are not a breed that enjoy the corporate way of doing business, and knowing that the big banks are not going to be hiring any new people due to the fact that they are going to be hammered with employment applications by loan officers, and that’s when crisis rise again and create more trouble in this industry.

    I see another wave of crisis for the mortgage industry that is coming, and this time it is going to really hurt and take little longer for everyone to adjust, also it’s going to reflect some unemployment and some financial crisis to some more people that are working hard and surviving out of today’s mortgage industry, the question is when is the crisis going to end for the people that are struggling to survive in today’s economy and decided not to leave the mortgage industry and decided not to work for the banks.

    I believe the answer to that, would be for the mortgage brokers and mortgage bankers to give more then what the big banks are giving to the public and to the real estate industry. It’s a simple philosophy give and you will get much more in return. We have set our path for 2011 strategy and the execution of our strategy will begin in January 15th of 2011. Our strategy will create opportunities for real estate agents to have more business and develop for them a strategy for continuous growth in return to have a massive bonding strategy between the real estate agents in our market with our loan officers in exchange for the value that is provided by the services and the strategies we bring to our industry. All we would like to ask for the loan officers, the mortgage brokers and mortgage bankers that are in the industry and they are facing some financial trouble or facing frustration of growth and development for their office or their company to join us on Facebook and join our company so we could put our hands together and promote what banks can’t promote, give the public and the real estate industry something that has never been provided and asking nothing in return.

    Our formula for success in 2011 is the way of conquering markets, it’s the new way to conquer this industry lets come together and turn this industry to our benefit and show the banks how hard it is going to be for them when we are taking their business away, and how much this industry is in a need for our breed of professionals.



  • Alicia Reid

    Since most of the people who will be shut out of this proposed change are people who bought their homes within the past 5 years, my prediction is that the elimination of the mortgage interest deduction for these higher income folks will indeed result in another wave of foreclosures and short sales.

    People in the higher cost of living areas may make higher incomes, but they struggle with their lifestyles matching their lower income peers in lower priced areas. So, you will see a lot of people who bought up to their limit of affordability, finding it difficult to make ends meet after they lose this deduction. Most households income is down. This is going to hurt a lot of middle class families, despite the rhetoric that states they’re “rich” and demonizes folks for working hard and earning higher wages. Our government needs to get out of the way of people succeeding and planning.

    If they’re going to tamper with the mortgage interest deduction for the high income earners this year, how can people in the brackets just below this make future plans? They could decide to eliminate the deduction for them in the near future? All this chage is breeding a climate of uncertainty and fear. No one can count on our tax system in this climate, to make their business plan for their own family, much less to create a sense of confidence enough for employers to invest here to create jobs.

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  • Jen

    Why doesn’t Congress decide to have the exact same health and other benefits that they have wanted us the people to have or that some already have.They are going after any and every area of even the smallest benefit for the hardworking american. They need to participate in Social Security and pay in and then not ever get their money back like the rest of us, in fact they do not pay in like us but receive LIFETIME BENEFITS FOR THEMSELVES AND OTHER TREATS FOR THEMSELVES FOR LIFE–WHAT OTHER JOB IN THE US DO YOU GET A SALARY FOR LIFE AFTER YOU LEAVE AND NOT PAY INTO THE SYSTEM AT ALL. We need to start changes and eliminating the wasteful spending within our Government first, not go after the only small treat relief deductions there are for us that work our butts off and work more than 80 hour weeks for companies. I say Congress needs some overhaul asap!

  • Tony

    So let’s see if I have this right. We are going to do away with Fannie and Freddie in their current form making it harder for many people to get mortgages. At the same time, we will make it much more expensive for people who can get a mortgage by eliminating their mortgage deduction. Seems to me the demand for housing will plummet and so will the value of housing creating more foreclosures and personal bankruptcy dragging the economy right down with it. Amazing how our politicians spend more and more of our money and then instead of cutting spending they choose half baked schemes that make things even worse. This proposal is a tax increase plain and simple and apparently the politicians behind it were not paying attention during the last election.

  • Tom

    I don’t get it – did some of the commentators above not read the article? I was against this until I read the article. I believe government needs to cut spending, and there are many areas they can run more responsibly, but this does not sound unreasonable if they take other reasonable steps as well.

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