Regardless of whether or not negotiations are made before the $800 billion fiscal cliff arrives at the end of this year, most of us should probably count on at least a reduction in the amount of mortgage interest we can deduct come tax season.
Remember the argument during the debates on whether or not the math added up where $5 trillion in tax rate decreases (proposed by Romney/Ryan) could be made up through the elimination of deductions and loopholes?
Well, regardless of wether or not you believed the math was doable, the fact is that of those potential deductions the mortgage interest one was one of the biggest whoppers on the list.
In 2012 alone the deductions allowed on mortgage interest has amounted to nearly $100 billion according to the whitehouse.gov graphic shown below. Due to the sheer size of this deduction it’s undoubtedly going to be a major issue addressed during capital hill’s fiscal cliff talks.
Top 5 Tax Expenditures:
The chart below breaks down all allowable tax deductions by dollar amount. You’ll see mortgage interest deductions comes in at the number 2 spot at $99 billion for 2012.
While I believe politicians on both sides of the aisle would agree it shouldn’t be abolished completely, I do see some rendering in it’s future – the most likely case being a cap of around $35,000.
Those who will get hit hardest by this are those families and individuals buying expensive properties and the real estate agents overseeing the sales and purchases of said properties. Potential indirect effects will likely be felt by home builders, landscapers and contractors as well.
Someone who has just taken out a jumbo sized mortgage stands to save a lot more on interest rate deductions than someone who purchases a more modest starter home. Therefor the individual or family taking out the jumbo sized mortgage will be affected with the greatest impact. Although this may seem like an attack on the rich, keep in mind federal housing programs geared towards struggling homeowners are also on the chopping list come January 2013.
Putting this entitlement we homeowners take for granted into perspective though shows the United States is actually far from the norm when it comes to allowing it’s citizens to deduct mortgage interest on their taxes. Only three countries even have such deductions – the US, Switzerland and the Netherlands.
Most countries do what Canada and most of Europe do and that is have only a minute portion of mortgage interest eligible for such tax exemption.