Author Topic: Is anyone else against itemized deductions towards personal residences?  (Read 11248 times)

GoingConcern

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Generally interest expense and property taxes are allowable as itemized deductions and many homebuyers end up buying homes that are outside their budget because of the tax savings allowed.  Now I'm the type of person (as many others on this forum are) that save their money and the itemizing my deductions are not a major part of my decision making when buying a home. 

Basically these deductions artificially inflate the demand for housing since there is a tax incentive to own as opposed to rent which then artificially inflates the prices for home.  Along with low interest cost (which is probably a bigger factor when buying a home) I feel it hurts savers like me that are wiling to put a huge down payment on the home and have to compete with buyers that are willing to put down a smaller down payment and buy a home they can not afford because they think of the tax savings.  If these itemized deductions did not exist then housing prices would probalby be lower, how much lower is another story. 

Am I right in my thinking? 

ShoulderThingThatGoesUp

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The tax code is just way too complicated. Consider the enormous efforts that go in to preparing taxes and how that effort could better be used.

I'd prefer a system that only required two inputs: total income from all sources and number of people dependent on that income. Real life is complicated, but there's no good reason for the tax code to be such a beast. It should be entirely deleted and replaced.

boarder42

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i dont think that people are buying above their means due to just the tax benefits.  I think the avg consumer doesnt understand money and buys what they can afford according to the biggest loan they can get.  I dont buy above my means but in today's world i put 20% down and take on a 30 year mortgage b/c rates are insanely too low to not do this.  Requiring 20% down would be nice.  I probably would have gotten the house across the street from me i just tried to buy if that were required. 

tax code should be a simple sales tax and be done with it.  get rid of income taxes.  tax what people spend... that way you dont have to log income.  and cash based legal/illegal business still pay taxes.  and that business is then auditted and has to pay the taxes they didnt collect from people if it ever gets to that point.  we're a spending nation just tax that.

HazelStone

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I would be fine with killing the mortgage interest deduction in exchange for a higher standard deduction, even if it results in slightly higher taxes in my case. More people have to stay mobile for the sake of their career, and not everyone is inclined toward home-ownership anyway. Why "penalize" them for their housing choice?

I also realize that as Sweetie and I kill off the mortgage we won't see any tax benefits once it gets below a certain amount.

velocistar237

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There would be a more significant difference between cash buyers and people who borrow than there is now, which would also be true for a high interest rate. Phasing out the deduction wouldn't make too huge a difference between a 20% down payment and a 10% down payment.

i dont think that people are buying above their means due to just the tax benefits. I think the avg consumer doesnt understand money and buys what they can afford according to the biggest loan they can get.

Exactly. The real factor is the insane willingness for people to stretch themselves to the limit to fulfill their unreasonable wants. That drives up the whole market and hurts everyone.

The mortgage interest deduction should be phased out at a much lower amount. It just doesn't make sense to subsidize housing beyond basic need.

GizmoTX

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When the tax deduction for credit card interest was eliminated, it removed a subsidized incentive for people to carry debt. Why should mortgage interest be treated any differently?

Axecleaver

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The one problem I have with eliminating the mortgage interest deduction is that it's the only government subsidy that the people in the upper quarter of the middle class can get. Income phase outs are in place for Medicare, IRAs, ACA and EIC. I fully expect phaseouts to appear for social security in the next 10 years.

If they eliminate the deduction, you'll see an immediate crash in housing prices as people dump houses (or suffer foreclosure) that they can't afford, and the effect of the subsidy disappearing drags down values. You could say that's a net positive, but it would hurt the economy for years to come.

I think we should tax the stuff we want to discourage - consumption. Taxing income punishes the most efficient producers in the economy. Eliminate the income tax and put a consumption/use tax in its place. Make basic needs like food and low-cost clothing tax free.

ShoulderThingThatGoesUp

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The one problem I have with eliminating the mortgage interest deduction is that it's the only government subsidy that the people in the upper quarter of the middle class can get. Income phase outs are in place for Medicare, IRAs, ACA and EIC. I fully expect phaseouts to appear for social security in the next 10 years.

If they eliminate the deduction, you'll see an immediate crash in housing prices as people dump houses (or suffer foreclosure) that they can't afford, and the effect of the subsidy disappearing drags down values. You could say that's a net positive, but it would hurt the economy for years to come.

I think we should tax the stuff we want to discourage - consumption. Taxing income punishes the most efficient producers in the economy. Eliminate the income tax and put a consumption/use tax in its place. Make basic needs like food and low-cost clothing tax free.

...How is that a problem? Rich people shouldn't get subsidies.

Eric

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Yes, eliminating the mortgage interest deduction would lower home prices.  But what does that matter?  Can you imagine the uproar if this was proposed by a politician?  It'd be a death sentence for their career and basically has no chance of happening.  Kind of seems futile to even discuss as a hypothetical. 

Paul der Krake

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If they eliminate the deduction, you'll see an immediate crash in housing prices as people dump houses (or suffer foreclosure) that they can't afford, and the effect of the subsidy disappearing drags down values. You could say that's a net positive, but it would hurt the economy for years to come.
We have no way of knowing the extent of the downward trend, should this happen. Calling it a crash seems a little excessive.

GoingConcern

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If an income tax was in place, I would remove all deductions and allow one standard deduction for all.  I would eliminate capital gains and ordinary gains tax differential (thus ordinary gains=capital gains are taxed at the same rate) and tax everyone at the same progressive tax rates albeit lower than the one that is currently in place.  Removing the capital gains preferential rate would eliminate many tax issues.

As for the deduction, I understand that the mortgage and property tax deduction is one of the few subsidies afforded to the middle class but the government should not be subsidizing or incentivizing home ownership. 

Yes, eliminating the mortgage interest deduction would lower home prices.  But what does that matter?  Can you imagine the uproar if this was proposed by a politician?  It'd be a death sentence for their career and basically has no chance of happening.  Kind of seems futile to even discuss as a hypothetical.

Fair enough but I am speaking hypothetically ofc.
« Last Edit: April 14, 2015, 12:55:53 PM by GoingConcern »

ShoulderThingThatGoesUp

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Here is a good article on the deduction.

It doesn't have beneficial social effects:

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If the deduction had a significantly stimulative effect on homeownership, we would expect to see a fast and continuous increase in the ownership rate as the dollar amount of the deduction continued to rise. But that has not been the case. For example, the dollar amount effectively doubled between 1995 and 2008, with little noticeable effect on how many Americans owned their homes. The primary impact of the deduction is to increase the amount spent on housing by consumers who would choose to own anyway, thereby subsidizing housing-spending rather than homeownership.

It chiefly benefits the rich:
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In 2009, only 22.1 percent of federal income tax returns contained the mortgage interest deduction. (The figure has remained between 21 and 26 percent since 1991.) Data from the congressional Joint Committee on Taxation (JCT) shows that only a small portion of taxpayers with incomes below $50,000 claim the deduction. In contrast, two-thirds of those with incomes above $100,000 do so.

Paul der Krake

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I understand that the mortgage and property tax deduction is one of the few subsidies afforded to the middle class but the government should not be subsidizing or incentivizing home ownership. 
Why not? Homeowners tend to take better care of their homes, have a heightened sense of responsibility, and provide a more stable environment for their children. All of which are highly desirable qualities governments want to see in their people.

ShoulderThingThatGoesUp

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I understand that the mortgage and property tax deduction is one of the few subsidies afforded to the middle class but the government should not be subsidizing or incentivizing home ownership. 
Why not? Homeowners tend to take better care of their homes, have a heightened sense of responsibility, and provide a more stable environment for their children. All of which are highly desirable qualities governments want to see in their people.

There's no evidence that the deduction causes more homeownership. The rate in the USA is similar to that of countries like Canada that don't have anything like the deduction.

frugalnacho

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If they eliminate the deduction, you'll see an immediate crash in housing prices as people dump houses (or suffer foreclosure) that they can't afford, and the effect of the subsidy disappearing drags down values. You could say that's a net positive, but it would hurt the economy for years to come.
We have no way of knowing the extent of the downward trend, should this happen. Calling it a crash seems a little excessive.

Also if you are stupid enough to stretch your budget so far that the difference between foreclosure and non-foreclosure is the amount of money you saved by being able to deduct the interest on your mortgage*...well you probably deserve to be foreclosed on.

*How much does the mortgage interest deduction really translate too?  For me it's nothing.  My housemortgage would have to be triple in price before the interest payments were large enough that I could really benefit from the deduction.  Even at that point the actual difference to my bank account seems minimal.  A few hundred bucks maybe.

Jack

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I don't really get why the mortgage interest deduction is such a big deal in the first place. In low cost-of-living-areas any reasonable mortgage won't even come close to providing a big enough deduction to make it worth itemizing. For example, I paid about $4500 in mortgage interest last year; that would need to more than double to make itemizing worth it for me.

tax code should be a simple sales tax and be done with it.  get rid of income taxes.  tax what people spend... that way you dont have to log income.  and cash based legal/illegal business still pay taxes.  and that business is then auditted and has to pay the taxes they didnt collect from people if it ever gets to that point.  we're a spending nation just tax that.

I think we should tax the stuff we want to discourage - consumption. Taxing income punishes the most efficient producers in the economy. Eliminate the income tax and put a consumption/use tax in its place. Make basic needs like food and low-cost clothing tax free.

I'm going to cross-post something similar to what I'd written earlier, but this time instead of being an example of political persuasion I intend for it to be actually persuasive:

From a microeconomic perspective, a "flat" sales tax sounds good because it rewards people for saving (or perhaps, punishes people for failing to save -- same difference). However, the trouble is that insufficiently-progressive taxation would destroy society by enabling really runaway wealth, which would give the elite too much political power. I'd say that taxation already isn't progressive enough as it is -- we should really consider putting it back like it was in the 1930s or '40s (e.g. 80+% for incomes over $5M). Switching to a sales tax would just make it worse: a flat sales tax is even more regressive than a flat income tax rate because income used for investing rather than spending gets taxed at 0%.

In a way, progressive vs. regressive taxation is similar to stable and unstable mechanical equilibria. A progressive tax will tend to force everyone's wealth to converge at a certain level (by "punishing" the wealthy and helping the poor, if you want to frame it in those terms), in the same way that a ball placed anywhere in a round bowl will roll to the middle (bottom). A regressive tax would do just the opposite: it would force everyone's wealth to diverge (by helping the wealthy while "punishing" the poor), kind of like how a ball placed in the center of an upended bowl and perturbed in one direction will roll to the opposite far edge as one that was placed in the center and perturbed in the other direction.

If an income tax was in place, I would remove all deductions and allow one standard deduction for all.  I would eliminate capital gains and ordinary gains tax differential (thus ordinary gains=capital gains are taxed at the same rate) and tax everyone at the same progressive tax rates albeit lower than the one that is currently in place.  Removing the capital gains preferential rate

+1

mm1970

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The tax code is just way too complicated. Consider the enormous efforts that go in to preparing taxes and how that effort could better be used.

I'd prefer a system that only required two inputs: total income from all sources and number of people dependent on that income. Real life is complicated, but there's no good reason for the tax code to be such a beast. It should be entirely deleted and replaced.
Totally.  Our tax return is >100 pages.  And I'm still trying to figure some things out.

But please don't take my mortgage interest deduction.

velocistar237

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If they eliminate the deduction, you'll see an immediate crash in housing prices as people dump houses (or suffer foreclosure) that they can't afford, and the effect of the subsidy disappearing drags down values. You could say that's a net positive, but it would hurt the economy for years to come.

It could be phased out over some period of time. That would give everyone time to adjust.

I think we should tax the stuff we want to discourage - consumption. Taxing income punishes the most efficient producers in the economy. Eliminate the income tax and put a consumption/use tax in its place. Make basic needs like food and low-cost clothing tax free.

I agree that taxing consumption is better than taxing income, but the equivalent tax rates would be through the roof and would never gain any support. For example, $25 out of $100 income is 25%, but $25 on $75 consumption is 33%. Also, I'm of the mind that taxes should be highly progressive (e.g., shift government from oligarchy toward democracy, reflect marginal purchasing utility, repair society from the wounds that caused inequality), and that sounds even more complicated than income tax brackets.

*How much does the mortgage interest deduction really translate too?  For me it's nothing.  My housemortgage would have to be triple in price before the interest payments were large enough that I could really benefit from the deduction.  Even at that point the actual difference to my bank account seems minimal.  A few hundred bucks maybe.

Yet another reason why the mostly the rich benefit -- people with low incomes don't itemize deductions anyway.

frugalnacho

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*How much does the mortgage interest deduction really translate too?  For me it's nothing.  My housemortgage would have to be triple in price before the interest payments were large enough that I could really benefit from the deduction.  Even at that point the actual difference to my bank account seems minimal.  A few hundred bucks maybe.

Yet another reason why the mostly the rich benefit -- people with low incomes don't itemize deductions anyway.

I don't know that I would qualify as "low income".  I make about 60k, and my wife will bring in about 10k.  I own 2 houses (wife and I live in one, and my parents and sisters live in the other), and even counting both mortgages I still don't have enough to itemize. 

velocistar237

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I don't know that I would qualify as "low income".  I make about 60k, and my wife will bring in about 10k.  I own 2 houses (wife and I live in one, and my parents and sisters live in the other), and even counting both mortgages I still don't have enough to itemize.

My comment wasn't specifically directed at your case. Your comment just brought the idea to mind.

frugalnacho

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I don't know that I would qualify as "low income".  I make about 60k, and my wife will bring in about 10k.  I own 2 houses (wife and I live in one, and my parents and sisters live in the other), and even counting both mortgages I still don't have enough to itemize.

My comment wasn't specifically directed at your case. Your comment just brought the idea to mind.

I guess my point is that I am above average for income AND own 2 houses and still take the standard deduction.  You either have to live in a ridiculously HCOL area, or take on an unreasonably large mortgage to even benefit from it in the first place.   It's not necessarily the income so much as the house size (although very low income people generally can't take on a mortgage large enough to actually see any real benefit to the interest deduction so I understand your point). 

I work with and socialize with some people that love their mortgage interest deduction, and I have come to believe it's just because they are bad at math and don't fully understand how it works.  If they just bought a more reasonable house and used the standard deduction they would come out so far ahead. 

Numbers Man

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It's a lot easier to pay down principal on your home when interest rates are in the 4% range. And also talk about whacking the interest deduction. What about when interest rates are 13%? You need to think back to the old days (mid 1980's) when people had to buy homes under those high interest rate times. The mortgage deduction really helped out those homeowners to get into a house and put down roots.

We're awfully lucky these days to have this low rate environment so that we can pay ourselves instead of the bank. And if you don't need the deduction then stop complaining, some borrowers could really use that deduction. I think there are bigger fish to fry like getting state and government spending under control.

Jack

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I work with and socialize with some people that love their mortgage interest deduction, and I have come to believe it's just because they are bad at math and don't fully understand how it works.  If they just bought a more reasonable house and used the standard deduction they would come out so far ahead.

I'd make an even stronger claim: I'm willing to bet that most people who like the mortgage interest deduction aren't even actually getting it because they don't do their own taxes, and don't realize their tax preparer is taking the standard deduction. You can ask people in low-cost areas all day long what they like about owning their (modest) home, and they'll tell you that one of the reasons is the tax deduction.

It's a lot easier to pay down principal on your home when interest rates are in the 4% range. And also talk about whacking the interest deduction. What about when interest rates are 13%? You need to think back to the old days (mid 1980's) when people had to buy homes under those high interest rate times. The mortgage deduction really helped out those homeowners to get into a house and put down roots.

Good point.

GoingConcern

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Quote
I work with and socialize with some people that love their mortgage interest deduction, and I have come to believe it's just because they are bad at math and don't fully understand how it works.  If they just bought a more reasonable house and used the standard deduction they would come out so far ahead.

I agree that many people don't understand the basic fundamental math behind their purchase, but the incentive to own a home (whether it is actually realized is another story) allows people to stretch out their home budget which increases home prices for us all. 

It's a lot easier to pay down principal on your home when interest rates are in the 4% range. And also talk about whacking the interest deduction. What about when interest rates are 13%? You need to think back to the old days (mid 1980's) when people had to buy homes under those high interest rate times. The mortgage deduction really helped out those homeowners to get into a house and put down roots.

We're awfully lucky these days to have this low rate environment so that we can pay ourselves instead of the bank. And if you don't need the deduction then stop complaining, some borrowers could really use that deduction. I think there are bigger fish to fry like getting state and government spending under control.

The market would eventually correct itself and home prices would come down to a more affordable level.  Low interest and tax incentives (to a lesser extent) artificially increase the prices for homes. 

Same could be said for education.  If government got out of guarnteeing loans and providing tax incentives for education then demand for schooling would decrease and prices would eventually come down.   

Gen Y Finance Journey

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I bought a home last year and did not factor in the tax benefits into my decision in the slightest. I think most people are aware they'll get a tax benefit from having a mortgage, but I doubt they crunch any real numbers. It's all about how much the bank is willing to lend you for most people.

However, I will say that the deduction was really nice for my first year of paying taxes post-house, since I had to realize pretty significant capital gains to access the money for my down payment. :) But it's absolutely a benefit that disproportionately helps wealthier Americans, and I would support a phase-out of the mortgage interest deduction because I acknowledge that I don't need the benefit, and we've got lots of people in this country who need help that aren't getting it.

Numbers Man

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I agree that many people don't understand the basic fundamental math behind their purchase, but the incentive to own a home (whether it is actually realized is another story) allows people to stretch out their home budget which increases home prices for us all. 

It's a lot easier to pay down principal on your home when interest rates are in the 4% range. And also talk about whacking the interest deduction. What about when interest rates are 13%? You need to think back to the old days (mid 1980's) when people had to buy homes under those high interest rate times. The mortgage deduction really helped out those homeowners to get into a house and put down roots.

We're awfully lucky these days to have this low rate environment so that we can pay ourselves instead of the bank. And if you don't need the deduction then stop complaining, some borrowers could really use that deduction. I think there are bigger fish to fry like getting state and government spending under control.

The market would eventually correct itself and home prices would come down to a more affordable level.  Low interest and tax incentives (to a lesser extent) artificially increase the prices for homes. 

Same could be said for education.  If government got out of guarnteeing loans and providing tax incentives for education then demand for schooling would decrease and prices would eventually come down.
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Home prices are a product of supply and demand and for the most part track to inflation over time. Getting rid of the mortgage interest deduction probably has no material impact on pricing. But might impact the consumer goods area whereas people won't have as much to spend. And would impact savers who can't save on their taxes.

frugaliknowit

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Start by phasing it out at the "McMansion level", maybe $500,000 for new purchases.

Then every five years ratchet down $50,000.  Of course, the realtor lobby will have a hissy fit...

Eventually, eliminate it completely.  The deduction causes distortions is capital allocation, making prices higher.  It favors the wealthy. 
« Last Edit: April 14, 2015, 01:51:59 PM by frugaliknowit »

velocistar237

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Home prices are a product of supply and demand and for the most part track to inflation over time. Getting rid of the mortgage interest deduction probably has no material impact on pricing.

A higher interest rate would mean higher payments, i.e., higher price. Higher prices factor into supply and demand quite directly.

Norioch

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I was a renter in 2008, and it infuriated me when politicians across the political spectrum talked about what could be done to keep home prices up as if that were a good thing. Now that I am a homeowner, I still don't want home prices to go up because if I sell my home I'll just have to buy another one. I'd still need a place to live. The only way generally high home prices would benefit me would be if I planned to downsize to a smaller home, and I'm already living in the smallest home I'd be comfortable with.

The mortgage deduction has never benefited and likely will never benefit me because I never plan to take out a mortgage with annual interest higher than the standard deduction.

In general I think taxes are too complicated but not too high. Eliminating the mortgage deduction would simultaneously makes taxes simpler and higher. I fully support eliminating the mortgage deduction.

Paul der Krake

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Start by phasing it out at the "McMansion level", maybe $500,000 for new purchases.

Then every five years ratchet down $50,000.  Of course, the realtor lobby will have a hissy fit...

Eventually, eliminate it completely.  The deduction causes distortions is capital allocation, making prices higher.  It favors the wealthy.
Breaking: HCOL dwellers riot as the government decides where you should live

mm1970

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Start by phasing it out at the "McMansion level", maybe $500,000 for new purchases.

Then every five years ratchet down $50,000.  Of course, the realtor lobby will have a hissy fit...

Eventually, eliminate it completely.  The deduction causes distortions is capital allocation, making prices higher.  It favors the wealthy.

Don't forget the HCOL areas.  I know we love to make sweeping generalizations here, but I bought a 2BR, 1BA house with no garage - essentially the BOTTOM of the single family house market in my town, and it was 50% more expensive than the $500,000 number.  Many people/ families on both coasts are in the same boat.

Where I live, and in many places, it's cheaper to rent - a LOT cheaper to rent.  But fact of the matter is, 10 years later, NOW it's break even to own.  Hopefully in 10 years, it will be cheaper to own.

TN_Steve

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I've been deducting interest on jumbo(s) since 1996 in LCOL areas (two different houses, home improvements, etc.).  Substantial sums in the 90s, which was nice to have given our marginal rate.

BUT, it makes no policy or economic sense to have it deductible--compare Canada's home ownership rate with USA, when it has neither the federally-established 30yr fixed-rate mtg, nor the interest deduction.  OTOH, as others mentioned, if the Code remains structured to tax income, rather than consumption, a broadening of the base should go hand in hand with lowering of marginal rates.  The 1986 Tax Act was a very strong, bi-partisan step in this direction--although even it left the mtg. deduction in place.

Realistically, not expecting to see it stricken from the Code in my lifetime--unless VAT or other consumption tax implemented, which could well require a constitutional amendment.

Mrs. PoP

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I think we should tax the stuff we want to discourage - consumption.

But providing tax breaks on mortgage interest simply encourages people to overbuy on housing - likely with more square footage, which will require more utilities, furniture, etc...  This tax break encourages consumption on multiple fronts, which is the opposite of what you say you would like to achieve. 

nobody123

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Where I live, I have to pay state and local income taxes, my wife pays self-employment taxes, as a homeowner I must pay property taxes, and because I have a mortgage I pay interest on it.  The Feds say I can itemize all of that if I choose to.  I also donate cash and goods to charity that I itemize.  If my health expenditures or tax preparation fees met a certain percentage of my income, I could deduct those too.  Why do people want to pick on the home mortgage interest deduction?  At least that encourages something that can be framed as a success for society.  I have a bigger issue with how alimony is treated, where folks end up with a tax break because they failed at marriage.

They should just eliminate any sort of deductions and just exempt whatever 2080 hours of the federal minimum wage times 1 for a single or times 2 for a married couple filing jointly is.  Progressively tax all income equally above that amount, whether it be capital gains, interest, dividends, or wages.



mak1277

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Where I live, I have to pay state and local income taxes, my wife pays self-employment taxes, as a homeowner I must pay property taxes, and because I have a mortgage I pay interest on it.  The Feds say I can itemize all of that if I choose to.  I also donate cash and goods to charity that I itemize.  If my health expenditures or tax preparation fees met a certain percentage of my income, I could deduct those too. 

This...

I'm not sure why people are talking about the mortgage interest deduction as the only thing that can be itemized.  I'm in a HCOL area, so my mortgage interest alone was enough to itemize for my wife and I, but we far exceeded that with other itemizable deductions (mainly charitable contributions but also property taxes, state taxes, etc.).

Jack

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I'm not sure why people are talking about the mortgage interest deduction as the only thing that can be itemized.  I'm in a HCOL area, so my mortgage interest alone was enough to itemize for my wife and I, but we far exceeded that with other itemizable deductions (mainly charitable contributions but also property taxes, state taxes, etc.).

We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Schaefer Light

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I think we should get rid of all deductions and switch to either a flat tax or a national sales tax.

nobody123

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We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Huh?  The 2015 standard deduction for a single filer is $6300.  That's not a high bar to hit.  The interest for the first year of a $150K mortgage (30 years @ 4%) is around $5900, average US property tax bill is around $2800.  Another $2500 or so for state/local income tax on a $50K salary...

mak1277

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I'm not sure why people are talking about the mortgage interest deduction as the only thing that can be itemized.  I'm in a HCOL area, so my mortgage interest alone was enough to itemize for my wife and I, but we far exceeded that with other itemizable deductions (mainly charitable contributions but also property taxes, state taxes, etc.).

We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Yeah, that's me...my charitable donations for 2014 were higher than my full PITI mortgage payments for the year.

teen persuasion

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We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Huh?  The 2015 standard deduction for a single filer is $6300.  That's not a high bar to hit.  The interest for the first year of a $150K mortgage (30 years @ 4%) is around $5900, average US property tax bill is around $2800.  Another $2500 or so for state/local income tax on a $50K salary...

But it is double that for MFJ.  It never made sense for us to itemize, even when we were paying on our 9.75% mortgage with high NYS property taxes.

pagoconcheques

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Count me with those who believe it has just served to inflate housing costs.  I would support phasing it out over a period of 7-10 years.  Of course, I also favor raising gasoline tax. 

But the deduction that annoys me the most is charitable donations to religious organizations.  Basically they mean that all taxpayers are subsidizing the churchgoing subset of the population, which totally violates my idea of separation of church and state. 

Jack

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We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Huh?  The 2015 standard deduction for a single filer is $6300.  That's not a high bar to hit.  The interest for the first year of a $150K mortgage (30 years @ 4%) is around $5900, average US property tax bill is around $2800.  Another $2500 or so for state/local income tax on a $50K salary...

Three words: married filing jointly.

Also, that "average US property tax bill" is skewed high because of HCOL areas.

For 2014, my standard deduction was $12,400, the interest on my ~$80K mortgage this year was ~$4400 (I need to re-fi; my interest rate is more than 4%), and I paid about $640 in property tax. My state income tax was about $2500 (albeit on a larger-than-$50K household income). That adds up to $7540, about 60% of the standard deduction. It's so far away that I didn't even bother calculating Schedule A this year to check.

Mrs. PoP

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We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Huh?  The 2015 standard deduction for a single filer is $6300.  That's not a high bar to hit.  The interest for the first year of a $150K mortgage (30 years @ 4%) is around $5900, average US property tax bill is around $2800.  Another $2500 or so for state/local income tax on a $50K salary...

Three words: married filing jointly.

Also, that "average US property tax bill" is skewed high because of HCOL areas.

For 2014, my standard deduction was $12,400, the interest on my ~$80K mortgage this year was ~$4400 (I need to re-fi; my interest rate is more than 4%), and I paid about $640 in property tax. My state income tax was about $2500 (albeit on a larger-than-$50K household income). That adds up to $7540, about 60% of the standard deduction. It's so far away that I didn't even bother calculating Schedule A this year to check.

Jack, you're not alone. 

Our mortgage interest was ~$3K in 2014, property taxes were <$1.8K, and we have no state income tax.  Sure, we could claim sales tax (I think), but we'd have to be spending a crap ton to have a 6% sales tax bill get us anywhere near the $12.4K standard deduction for our DINK household.  We don't live in a particularly LCOL place, but we didn't buy beachfront or a McMansion, either. 

forummm

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Yes, mortgage interest deductions should be eliminated. As should nearly all the loopholes in the tax code. I'd even be OK with eliminating retirement savings carve-outs if we got rid of all the junk. There are over $1 trillion per year in tax loopholes.

clifp

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We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Huh?  The 2015 standard deduction for a single filer is $6300.  That's not a high bar to hit.  The interest for the first year of a $150K mortgage (30 years @ 4%) is around $5900, average US property tax bill is around $2800.  Another $2500 or so for state/local income tax on a $50K salary...

Three words: married filing jointly.

Also, that "average US property tax bill" is skewed high because of HCOL areas.

For 2014, my standard deduction was $12,400, the interest on my ~$80K mortgage this year was ~$4400 (I need to re-fi; my interest rate is more than 4%), and I paid about $640 in property tax. My state income tax was about $2500 (albeit on a larger-than-$50K household income). That adds up to $7540, about 60% of the standard deduction. It's so far away that I didn't even bother calculating Schedule A this year to check.

The median home price in the US 189K so 150K mortgage is pretty much the norm. So we could just as easily argue that your house is bringing down the average.  Interest, + property taxes, state income tax is roughly equal to standard deduction for most married married couple.  Roughly 2/3 of the population takes the standard deduction, I am imagine among the 65% of the people who own homes roughly 1/2 take the standard deduction and 1/2 don't.  Mortgage interest is big factor for the majority of folks who itemize.

We have abnormally low interest rates once they get back to a more normal 5%-8% range it will be a bigger factor for many people.

nobody123

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We're not saying the mortgage interest deduction is the only thing that can be itemized. We're saying that, in LCOL areas, even all those deductions added together still don't come anywhere close to the standard deduction.

I mean, if I were tithing or something that might be enough to hit it, but it would have to be a literal "tithe" (as in, an entire tenth of my income going to charity). I'd be spending almost as much on charity as I do on my entire mortgage, including principal!

Huh?  The 2015 standard deduction for a single filer is $6300.  That's not a high bar to hit.  The interest for the first year of a $150K mortgage (30 years @ 4%) is around $5900, average US property tax bill is around $2800.  Another $2500 or so for state/local income tax on a $50K salary...

Three words: married filing jointly.

Also, that "average US property tax bill" is skewed high because of HCOL areas.

For 2014, my standard deduction was $12,400, the interest on my ~$80K mortgage this year was ~$4400 (I need to re-fi; my interest rate is more than 4%), and I paid about $640 in property tax. My state income tax was about $2500 (albeit on a larger-than-$50K household income). That adds up to $7540, about 60% of the standard deduction. It's so far away that I didn't even bother calculating Schedule A this year to check.

My property tax bill is about 8X that in a suburban area in Northeast Ohio, which is generally considered a lower-than-average COL area.  It's mainly due to the fact that Ohio has a ridiculous school funding system that (while have been declared unconstitutional by the state Supreme Court many years ago) is heavily based on property taxes.  I would assume that if our property taxes were lower, some other deductible tax would be higher to compensate.  I filed jointly, and I had around $18K in itemized deductions (on a significantly larger than $50K income).  Take away the mortgage interest, and I'm probably right around or just above the $12,400 standard deduction.

I'm sure that given my income / home value that I would pay much higher or lower taxes if I was magically transported to New Jersey or Louisiana, for example.  Don't get me wrong, I look forward to the day that the standard deduction is a better value for me, because it means I'm paying a lot less out over the course of the year.  I just don't think that you can generalize the value of the MI deduction in a vacuum, given the insane level of taxing diversity across the country.



Jack

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I paid about $640 in property tax.

My property tax bill is about 8X that in a suburban area in Northeast Ohio, which is generally considered a lower-than-average COL area.  It's mainly due to the fact that Ohio has a ridiculous school funding system that (while have been declared unconstitutional by the state Supreme Court many years ago) is heavily based on property taxes.  I would assume that if our property taxes were lower, some other deductible tax would be higher to compensate.

...

I just don't think that you can generalize the value of the MI deduction in a vacuum, given the insane level of taxing diversity across the country.

You have a point about that. My property taxes are extremely low because (a) my home value is low to begin with, (b) the assessed value is lower than the actual market value, (c) the homestead exemption is a large fraction of the assessed value, and (d) the county has a Homestead Option Sales Tax (HOST) that increases the effective homestead exemption even further.

In fact, even that small tax bill is dominated by a $463 flat fee for trash pickup, which IIRC isn't actually deductible according to IRS rules. I think that if I itemized, I'd only actually be able to deduct about $175! (Not to mention, I couldn't care less about the millage rate here -- for me, the biggest factor that would reduce my taxes would be if Public Works switched to "pay as you throw" billing for trash pickup!)

Basically, in my area the less affluent half of the city (and county) pays very little property tax, and the people with expensive houses get absolutely reamed. In fact, that's why many parts of suburban Fulton and Dekalb county are incorporating themselves into cities, and why the northern Fulton suburbs keep trying to secede from Fulton County.

Axecleaver

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Quote
I fully expect phaseouts to appear for social security in the next 10 years.

Not to derail the thread, but geez, that prediction didn't take long to happen. Chris Christie just proposed social security phaseouts in his latest speech:

http://www.vox.com/2015/4/16/8422945/chris-christie-social-security

BlueHouse

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I paid over $16K in property tax last year, so I'm pretty glad it's there for me. 

I will take a page from Bill Gates and Warren Buffett's playbook and I won't suggest ending any loopholes that I benefit from until after I am completely financially secure.  Call me cynical, but it's really easy to be generous when you already know that neither you nor any member of your family will be poor. 

grantmeaname

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If you guys want some numbers about the home mortgage interest deduction I'd suggest checking out this highly informative table from one of my favorite books, The Benefit and The Burden. It provides highly productive perspectives to use as you think about taxes and tax reform, as I mentioned last time I waded into a flat tax thread.

I am incredibly anti-HMID. Here are the arguments that have been made in favor of it in this thread from my reading:
1) I receive this benefit and want it to continue. Well, you probably receive a very small amount of this benefit. If it were eliminated as part of revenue-neutral tax reform - tax rates dropping enough to offset the revenue gain from the elimination - your taxes would still probably be lower if you owned a reasonably sized house. The fact is that the top handful get the lion's share of the home mortgage interest deduction and we get either none of it or very little. Would your taxes really be higher if you were in the 10% bracket because of the revenue preserved by cutting the deduction?

2) The government should encourage homeownership. I don't know if it should; that's a horizontal transfer to people who invest in houses from similarly situated other taxpayers who own restaurants or index funds or college degrees. But even if the government should do so, it could do so with a limited HMID like the one velocistar proposed. As my link demonstrates, people with five figures in their AGI get only 31% of the HMID. Cut it off there, or at $200,000 AGI even, or a similar threshold based on interest amount, and you can still subsidize homeownership without giving away so much revenue. You can broaden homeownership without paying 39.6% of the interest on billionaires' mortgages.

3) This is small potatoes and we should worry about state and local government spending instead. Wrong! The HMID is $100B this year, or half the size of all the revenue collected by the corporate income tax. It's enormous. The Benefit and the Burden had a great pie graph that I can't seem to find a preview of, but it seems that it's the size of most of the other tax expenditures combined. Additionally, fixing the HMID would address state and local government spending! When taxpayers deduct their property taxes, the IRS is effectively transferring 39.6% of the property tax amount from the federal government to your local government. If the local government thinks a project is only just worth it now, it'll probably not be worth it if the IRS no longer kicks in 40% of the cost! (The state and local interest bond exemption works the same way.)

There may be something to the idea that housing prices would be strongly impacted by an elimination of the HMID. I think the answer here is to move to a limited deduction so that the top few percent of houses may decline in value but the effect on the total housing market should be minimal. The other common objection, not raised in this thread yet to my knowledge, is that eliminating the deduction makes it harder to deduct other deductions from AGI like charitable contributions. That's not an easy one to answer but I'd propose making all deductions that survive tax reform be for AGI.