WHAT ABOUT THE MORTGAGE INTEREST DEDUCTION

Professor Annette Nellen has some thoughts on “Tax Reform and the Mortgage Interest Deduction” at 21st CENTURY TAXATION.

Her bottom line -

“To keep lower tax rates, remove inequities, remove economic distortions, simplify the law and reduce the debt and deficit, I recommend:

·      Phase-out the home equity interest deduction over 5 years.

·      Phase-out the deduction for interest on a vacation home over 5 years.

·      Phase-out the $1 million debt limit on acquisition debt over 5 years. Drop it to $500,000 adjusted annually for inflation.

·      Convert the deduction to a tax credit.”

The idea of doing away with this deduction is not new.  In a post from June of 2010 I noted –

“Howard Gleckman posed the question “Should We Dump the Home Mortgage Interest Deduction?” at TAXVOX, the blog of the Tax Policy Center.

Kay Bell added her two cents to Howard’s commentary in “Is It Time to Kill the Mortgage Interest tax Deduction” at DON'T MESS WITH TAXES.

A recent tweet led me to the article “Mortgage Deduction: America's Costliest Tax Break” By Jeanne Sahadi at CNNMoney.com from April.”

While I support doing away with the deduction for mortgage interest on 2nd homes and home equity interest, and would do it “cold turkey” and not via a phase-out, I have always wanted to keep the deduction for interest on loans to buy or build your personal residence.

Here is what I said about the deduction in my post “THE NEW TAX CODE - INTEREST AND TAXES"

“The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast (New York, certainly New Jersey, and Connecticut) or California that has an income of $150,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, Connecticut, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.”

This is the same reason I would keep the deduction for real estate and state and local income taxes.

I have seen no talk about this geographic inequity in the tax reform debate.  Am I the only one who sees it as an issue? 

 

Please let me know your thoughts on the subject.

TTFN