Mortgage-interest deduction may not be as enormous as previously estimated

February 15, 2013

In the debate over whether to reduce or eliminate the home-mortgage interest tax deduction — or to leave it alone — one fact has been virtually unchallenged: The write-off used by millions of American homeowners costs the government huge amounts of revenue, something like $100 billion a year.

This sum adds to the federal deficit and debt, and it has ranked the deduction high on the hit list of most tax-reform agendas, including the bipartisan Simpson-Bowles deficit commission’s plan. Throughout his first term in office, President Obama called for limiting it, and he ran for reelection on a platform to pare down its costs. The compromise congressional tax package that ended the “fiscal cliff” crisis Jan. 2 also contained a mortgage write-off limitation that was targeted at high-income taxpayers.

But hold on. How much does allowing owners to deduct the interest they pay on their home loans really cost the government? Congress’s technical experts on the subject have come up with new estimates that should figure into deliberations expected later this year on overhauling the federal tax code. Their findings: The mortgage write-off costs tens of billions of dollars less than previously believed.

One day after the Internal Revenue Service released its latest instructions for claiming the mortgage-interest write-off, the nonpartisan Joint Committee on Taxation published revised estimates indicating that because of changes in the economy and tax legislation, the cost of the deduction for fiscal 2013 will be $69.7 billion.

That’s a dramatic reduction from the same committee’s earlier numbers. In a projection released in January 2010, it said the cost of the write-off in fiscal 2013 would hit an all-time high of $134.7 billion. Under the revised estimates, costs will slowly rise over $70 billion over the next few years and will exceed $80 billion only in fiscal 2017, when they hit $83.4 billion.

Sure, these are all eye-glazing, monstrous numbers. And there’s no question that mortgage write-offs can be criticized for being skewed toward wealthier owners, especially in higher-cost markets on the West and East coasts. But the fact remains: There’s less fiscal meat here than previously advertised. The write-off is still a large and vulnerable target, but it’s not as costly as widely portrayed. You could even argue that if congressional tax reformers are looking for reductions in projected “tax expenditures” to reduce upcoming deficits, they just got a nice chunk via the revised estimates from the Joint Tax Committee, their own in-house technicians.

The same committee also just lowered its earlier estimates on local property tax write-offs by homeowners. Rather than the $30 billion cost projected for fiscal 2013 back in 2010, the updated estimate is now $27 billion. The only significant increase in the revised projections: Thanks in part to improvements in the housing market, capital gains exclusions — the $250,000 that single homeowners ($500,000 for joint filers) get to pocket tax-free on profits when they sell their primary homes — will cost the Treasury $23.8 billion in 2013, rather than the $19.8 billion estimated in 2010. In the curious world of tax subsidies, good news — in this case, home values — costs the government more.

Meanwhile, the IRS has released its latest instructions for owners seeking to take the mortgage-interest deduction in the coming tax-filing season. Among some noteworthy points:

●Thanks to the “fiscal cliff” tax bill, mortgage insurance premiums, including those paid on conventional low-down-payment loans, FHA premiums, VA funding fees and Rural Housing Service guarantee fees, are deductible for tax year 2012. But note the income limitations: Once your adjusted gross income exceeds $100,000 ($50,000 if you’re filing singly), your write-offs are subject to a phase-down schedule that reduces the deduction to zero above $109,000 ($54,500 for singles).

●The federal tax code contains a variety of restrictions — some of them complex — on how much mortgage interest, if any, you can write off. For example, if you’ve got an office in your home, rent out a portion of your house, rent out your second home for significant periods of time during the year or paid “points” on a new mortgage or refinancing last year, there are special rules you need to know. The best way to get up to speed is to download the IRS’s latest guidance on the deduction, Publication 936, 2012 revised edition, at www.irs.gov.

Ken Harney’s e-mail address is kenharney@earthlink.net.

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