The mortgage interest deduction has been a pillar of the federal income tax since the tax’s inception in 1913. But in a country that is not that far removed from the Fiscal Cliff, even the pillars are under review.
Last spring, the House Ways and Means Committee held hearings on loopholes that could be closed in the tax code. At that time, the committee’s chair said that a revision to the tax deduction for home mortgage interest could be part of a broader tax reform package.
To be sure, the political dynamics of actually passing such a reform are daunting at best. But the talk of reform is a reminder for taxpayers in Southern California and across the country of the importance of intelligent tax planning. Such planning makes full use of tax deductions, tax credits and tax exemptions within the bounds of the law.
Of course, sometimes tax controversies arise. The IRS or state revenue agencies may raise concerns about a particular tax strategy or ask for more information about it. But these are issues that a tax attorney can address in specific cases and help resolve.
The mortgage interest deduction has been part of the federal tax code for so long that it is easy to lose sight of how much tax revenue is lost due to the deduction. One independent budget analyst recently estimated the amount as $70 billion per year.
But the benefit from the deduction goes primarily to homeowners who make more than $100,000 per year. And so one proposal Congress may consider is to turn the mortgage interest deduction into a tax credit. This could enable more taxpayers to benefit.
But it is unlikely that such changes would be made without other changes that bring in more revenue. For example, Congress could limit the availability of a home mortgage tax credit to $500,000 in mortgage debt. The current home mortgage deduction, by contrast, applies to up to $1 million of mortgage debt.
Source: CNBC, “How the Mortgage Interest Deduction Could Change,” Mark Koba, July 9, 2013