Wednesday, November 28, 2012

Schedule A Cap Another Way to Increase Tax Revenue Through Tax on the Rich

As the House, Senate, and Obama Administration rangle over how to avoid the fiscal cliff, most pundits seem completely oblivious to the complexity of the tax issue.  There are multiple tax provisions at stake:
    1.  Highest tax bracket changing from 35% to 39%
    2.  Lowest tax bracket changing from 10% to 15%
    3.  Capital gains tax increasing from 15% to 20%
    4.  Tax on dividends treated as ordinary income
    5.  Social Security contribution increasing by 2%
    6.  25 million additional taxpayers subject to Alternative Minimum Tax
    7.  Standard deduction drops by $2000
    8.  Reinstatement of the marriage penalty
    9.  Reduction in child tax credit

And the list goes on.  For a very detailed and well presented list of the changes in the tax law that will take effect if there is a failure of Washington to reach agreement go here.
Some estimates say that these changes taken together would impact middle class taxpayers anywhere from $700 a year to as much as $2000 per month, depending on income and deductions currently being taken.  Obama has pegged the number at $2200.

But while these amounts may seem like a lot to ask of already struggling citizens, there is a general sense in Washington that revenue must be increased whether or not the economy produces more jobs and income to drive revenues up naturally. 

At the top of the list is the mortgage interest deduction, and the reason it is getting the most attention is because it offers the largest single revenue source.  However, it is hard to find anyone willing to suggest it be repealed entirely. 

One idea that is being suggested is that the total available deductions on schedule A be limited to $50,000.  This would insure that only taxpayers making over $150,000 are impacted.  But, of course, the trade off is that total revenues from such a change would only be a pittance in the effort to reduce the deficit.

Be sure to read our other posts from the last few weeks as we have explored every nook, cranny, and nuance, and have pointed you to other articles that flesh out even more details. 

For more on this subject also read:

Monday, November 26, 2012

Shocking Unintended Consequences if Mortgage interest Deduction is Eliminated

Everyone knows that if you take away the mortgage interest deduction, housing prices will crash, homeowners will lose $1000's in home values and pay huge increases in taxes, and the real estate and mortgage industry will slump back into depression.  But as with so many things, what everybody knows may not be right…this analysis might even be dead wrong. 

Our form of government is particularly horrible at thinking through the unintended consequences of its actions.  A perfect example would be the changing of the way apartment owner's wrote off depreciation back in the 80's.  The increasing of the number of years to fully depreciate an apartment building seemed like a perfectly fair and reasonable thing to do.  One can, however, make a strong argument that the result of that tax decision destroyed the savings and loan industry, and cost the government far more in losses from reduced property values and s & l bailouts than it every gained in tax revenues. 

It is far from clear that any change in the mortgage interest deduction will benefit tax revenues, hurt homeowners, or greatly effect mortgage production.  We are about to enter some tall weeds of analysis, for which I apologize in advance. 

The basic assumptions about the effects of the ending of mortgage interest deductions make claims that are mutually exclusive.  Here is a simple one.  Home prices will drop by 15% according to some studies.  Maybe they will drop more or less than this, but let's take that number.  If home prices do drop by that much, it should be clear that it will provide a boost to the real estate market as cost goes down, demand rises.  At least in the short term, marginal buyers will be benefited as they will have a lower down payment and monthly payment, thus adding buyers to the market.  You could further argue that the added demand would at some point push prices back up until there was a leveling effect.

The above proposition would be true only if prices dropped by 15%.  Unfortunately for the entree level buyer, there is no current tax advantage from mortgage interest deductions.  It is clear that the benefit only starts at about $75,000 in income and $200,000 in total mortgage.  And even for that buyer, the tax savings are modest.  Thus the argument for a drop in values only applies on homes of $250,000 or more, and really, quite a bit more. 

Since the mortgage interest deduction does not apply to amounts above $1,000,000, the home value drop and higher tax rate will most impact homeowners with incomes above $100,000 and mortgages above $500,000, but less than $1million.  If homes in that range drop by 15%, new buyers would have roughly no effect on their purchasing power for that value of home.  The loss of tax advantage would be offset by the lower mortgage amount. 

Current owners with mortgages would have a huge double wammy, potentially driving more in this group into upside down status on their mortgages and reducing their ability to pay.  This could result in more foreclosures in the short term, and a huge loss of wealth and purchasing power from the most productive segment of society. 

If the mortgage interests deduction is even good policy, it would seem to be a very bad idea to abruptly end it.  The effect on realtors and mortgage companies would seem to be limited and short term.  But the effect on the middle class would be substantial.  A phased in approach would lower the impact.  This could be done by setting a maximum on schedule A deductions, reducing the cap on the total mortgage interest deduction, or only allowing a declining percentage of the deduction to be applied. 

Most who argue for this deduction to be dropped, insist that there be an accompanying drop in tax rates by 10%.  This would certainly offset the loss of spending power, thus making the same value of home affordable as before.  If spendable income remains roughly the same, an argument can be made that their would not be the drop in home values as you would have the same number of dollars chasing the same supply of homes. 

Please offer your thinking on this.  Are there any errors in the above analysis?  Are we better off to drop the deductions and have a lower tax rate?

For more on this subject also read:

Monday, November 19, 2012

Government and Mortgage Holders Fight Over $100 Billion Per Year Tax Advantage

The Los Angeles Times reports that the mortgage interest deduction is no small tax benefit.  The US government loses about $100 billion per year or 1 trillion over 10 years. 

The mortgage interest deduction alone will cost the federal government $484.1 billion from fiscal 2010 to 2014 — $98.5 billion in 2013 and $106.8 billion in 2014, according to estimates from the congressional Joint Committee on Taxation. Write-offs by homeowners of local and state property taxes account for an additional $120.9 billion during the same four-year period.

Therefore, as the government looks for revenues to close the massive trillion dollar annual deficit, this "expense" is seen as ripe for the plucking.  Obviously, if it is big ripe plum for the government, it is also a huge benefit to a bunch of taxpayers who are loath to give it up.  The Times goes on to suggest some of the options on the table for changing this tax benefit.

A $25,000 cap on itemized deductions, as proposed by Mitt Romney in the second debate, would hit many people in the $50,000 to $200,000 income range, Kolko said. It would take a much bigger bite out of upper-income households beyond $200,000, of course, where the average total for all itemized deductions came to $81,000 in the IRS data from 2009. Romney's plan envisions that the losses in deductions for all categories of taxpayers would be offset by the lower payments they'd be making based on a one-fifth reduction in marginal rates.

President Obama supports a cutback in housing-related and other write-offs for people with incomes above $250,000.

These are certainly not the only options.  We have listed others here.  However, one that has come to our attention since, is a tax credit similar to the first time homebuyer's tax credit.  This could be used to replace the schedule A deduction.  Some real estate experts say this would have a much bigger impact on getting home sales going again compared to the current mortgage interest deduction.  Existing mortgage holders aren't as enthusiastic about such a change, of course.

Saturday, November 17, 2012

Options to Change or Replace Mortgage Interest Deduction

 As Congress, the President, and the people contemplate how to change the tax law in order to provide increases in revenues through increasing tax rates, closing loopholes, or increasing income through a vibrant economy, the mortgage interest deduction has been at the forefront of possible places to find new revenues.  There are few who suggest just eliminating the tax benefit, but many possible options for reducing or changing the current deduction. 

Among the proposals on how to change this huge "cost" to the government would be:
    ● Only eliminate this deduction for taxpayers in the $250,000 or higher income
    ● Maximize the total amount that can be deducted by anyone
    ● End the benefit on second homes and vacation property
    ● Maximize the total of all deductions on Schedule A
    ● Eliminate the deduction immediately
    ● Phase out the deduction like was done with all other interest during the Reagan

Do you have another approach or have you seen another option?  Please add in the comments.  

Thursday, November 15, 2012

President Obama News Conference: Tax Increase Still On for Rich to Fix Fiscal Cliff

This taxpayer would not be effected with mortgage of $1100.
President Obama today suggested pushing off decisions on tax reform, but immediately increasing taxes on those making over $250,000 through a revised extension of the Bush era tax cuts.  He even appeared to be suggesting that the reduction in employee social security contributions be continued.  Not sure about that, but I don't think either house of congress is likely to approve that extension.

But the hot topic from both pundits and politicians is the schedule A.  The Democrats seem to be embracing Romney's suggestion that the total schedule A deductions be limited to $25,000, meaning that the potential to use mortgage interest and charitable deductions (the big items) would be severely limited.  A $2000 per month mortgage/property tax would cap the category.  This would potentially have a significant impact on homeowners who give generously to charity and have a $600,000 mortgage.  Not exactly the 1%. 

The Democrats may love this idea as revenue generating, and it certainly would be, but they will find that the Republicans will not have forgotten that Romney's plan had a second step.  Reducing overall tax brackets by 10%.  Part A without Part B will never get past the house.  With 46 days to go before we hit the cliff, there are plenty of ideas, but still no leadership.  And it appears that the POTUS is punting most of the issue to another quarter. 

Image thanks to

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Wednesday, November 14, 2012

More on the Fiscal Cliff and Your Mortgage Interest Deduction - Diana Olick of CNBC

The Cliff and Your Mortgage 

Tuesday, November 13, 2012

9 Reasons to Eliminate the Home Mortgage Interest Tax Deduction

In our continuing series about the possibility that the home mortgage interest deduction will be modified, radically altered, or even eliminated by Congress and President Obama in an attempt to raise more tax revenue, we take a brief look at the top 9 reasons why the tax deduction should go.  
  1. Government should not be subsidizing borrowing.  Home mortgage interest tax deduction is not an incentive to buy a home, but an incentive to borrow money.  Why help the banks?
  2. Current approach artificially increases the value of homes to the detriment of new buyers
  3. Government loses potential tax revenues
  4. The wealthy benefit most, making this deduction regressive
  5. Eliminating this and other deductions simplify the tax code
  6. Current system is unfair to renters
  7. Benefit to homeowners is small, often nonexistent 
  8. Government should not be incentivizing home ownership over renting
  9. Better for middle class to have lower rate or higher standard deduction
These same reasons could also be used to support the choice of modifying the existing tax benefit.  Some in congress are suggesting caps on the total deduction, limiting the deduction for those who are in the top income tax brackets, or phasing out the deduction over several years.  

In most cases the plans being put forth to eliminate or modify the mortgage interest deduction would be offset by increases in the standard deduction or decreases in the underlying tax brackets.  Some would reduce each bracket by 10% and eliminate most loopholes.  

What do you think?  We've laid out the 10 benefits of the mortgage interest deduction to taxpaying homeowners, and 7 Social Benefits of Home Ownership and 6 Social Benefits of Renting, and now 9 reasons to eliminate the deduction.  Have we missed anything?  

Next we will look at whether or not there is actually a significant benefit to a significant number of taxpayers, or whether the elimination of the mortgage interest deduction might actually be a wash to those who currently use it.

Also read:

Friday, November 2, 2012

10 Benefits to Taxpaying Homeowners of Mortgage Interest Deduction

10 Financial Benefits to Taxpayers of Homeownership

In a previous post we laid out the basic arguments regarding whether or not there are societal benefits to homeownership vs renting.  Now we take a look at the financial benefits to the individual taxpayer of owning vs renting.  This will be a brief overview.  In a future post we will dig down into a full and detailed financial analysis.

Unlike a list of social benefits which one could argue that the government might have a reason to subsidize, these benefits are those that the homeowner themselves get from purchasing.  It is part of the equation they would consider in making a purchase rather than remaining a renter.  It is certainly reasonable that this class of taxpayers and voters would "vote their pocketbook" to their advantage. 

Top Ten Financial Benefits of Homeownership
    1.    Provides an asset
    2.    Stabilizes monthly payment
    3.    Control your own destiny
    4.    Forced savings
    5.    Equity available for other purposes
    6.    Potential gain in market value
    7.    Can add to value through improvements
    8.    Establishes credit
    9.    Allows for long term furnishing purchases
    10.    Mortgage Interest and property tax deductions

Clearly, these advantages don't depend on the mortgage interest deduction.  It serves as an incentive, and one can make the argument that it lowers the cost of ownership, providing the owner with the ability to own more house than they could without the deduction. 

Should homeowners vote their personal wallets?  Many others choose their leaders and vote on issues that work to the advantage of a group they are part of.  Or should Americans be more interested in voting for leaders and issues that are best for the country. 

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