Individuals are permitted to deduct mortgage interest paid on mortgage debt of up to $1 million. The deduction is available for interest on mortgages for a principal residence and one additional residence. The $1 million limitation represents the combined allowable debt on two residences. Mortgage interest on up to $100,000 of debt on home equity loans or lines of credit also qualifies for the deduction.
As part of its FY 2011 budget, the Administration has proposed limiting the value of the MID for upper income taxpayers by, in effect, converting the deduction to a 28% tax credit for those individuals who are currently in the 33% or 35% tax brackets. Individuals with incomes below $250,000 would generally not be directly affected by this proposal.
The mortgage interest deduction (MID) is a remarkably effective tool that facilitates homeownership. While only about 30% of all taxpayers in any given year itemize their deductions, more than 3/4 of homeowners utilize the deduction over the period they own their home.
Currently, taxpayers in the 33% and 35% income brackets are able to reduce their taxes through deductions for mortgage interest payments, charitable contributions, local taxes and other expenses by 33 and 35 cents, respectively, on the dollar. Under the Administration's proposal, these individuals would only be able to reduce their tax bill by only 28 cents on the dollar. The Administration estimates that the change would raise $318 billion over the next 10 years.
Many national real estate trade groups believe the proposal is ill-timed and ill-advised and could have an adverse impact on housing values and the pace of economic recovery.
Most members of Congress have also opposed the budget proposal. To date, limits on itemized deductions have not been part of the legislative agenda. Note, however, that in August 2009, the Congressional Budget Office (CBO) released its annual report identifying possible revenue sources. These included several new limitations on MID.
So, while the Mortgage Interest Deduction has become a perceived right by homeowners and buyers, there is no guarantee that the MID will continue to be one more reason for home ownership.