Tax Credit Cut Proposal Old Effort

By Kim Olson

It’s been the rule for decades that if you’ve got a home, you can get a tax deduction on your mortgage interest no matter who you are. income tax But now, the Obama administration wants to eliminate it so as to help reduce the deficit — right?


It’s actually not what you think. In fact, most people don’t get eliminated. Most people, in fact, would still qualify for this valuable tax decduction. Only wealthier folks wouldn’t qualify.

Most homeowners would still keep this deduction. If you’re wealthier, you might get cut off. That is, you wouldn’t get to deduct the interest on your primary home mortgage if its value is above $500,000, with the current limit set at $1 million. You also wouldn’t get to deduct the tax on interest for home equity loans and lines of credit, or for the mortgages of second homes. Currently, you can deduct up to $100,000 for loans and lines of credit of these types.

That’s a very different scenario than what many think this valuable deduction would be COMPLETELY eliminated were the Obama administration to get its way. That’s not true at all, though. Instead, as the proposal goes, those in upper income echelons would lose this deduction, but those with more modest incomes would keep it. As one Duke University professor put it, “It’s really just a gift to the owners of very expensive homes.”

What the Numbers Really Mean

As things currently stand, the deduction gives a $131 billion tax break to the wealthy. The Tax Policy Center at the Urban Institute points out that the Department of Housing and Urban Development has only shelled out $48 billion, much less than this “fat cat” tax break saves wealthy people. Most of the current benefit for this deduction goes to the top 20% of the population as broken out by income distribution. Therefore, under current proposals, most of America wouldn’t even see a difference.

home credit

It’s Not a New Idea

Although eliminating this tax credit is commonly being touted as the Obama administration’s idea, it’s not new. In 2005, a tax reform panel brought together by George W. Bush had similar recommendations, to scale back the deduction and offset it as needed through a tax deduction. It didn’t take hold, but it’s now being brought back as a way to help reduce the deficit.

Back in 1986, President Ronald Reagan pushed through a tax reform bill that eliminated consumers’ ability to deduct credit card and consumer loan interest, but loudly proclaimed at the same time that the mortgage interest deduction was “an untouchable sacred cow.”

Implementing this change would have no impact on anyone’s ability to buy a home. That’s because people with modest incomes would still qualify for the tax credit (assuming they could afford a home), and wealthy people could still buy the homes they wanted; they wouldn’t be able to take a mortgage tax deduction, but that wouldn’t make or break their ability to buy a home.