With the ink barely dry on last year's Tax Reform Act, and thousands of homeowners bewildered about their correct mortgage deductions for next April, Congress stepped into the breach last week.
The bottom line: You may get still another major change in the federal tax law governing your home mortgage writeoffs. Or -- if President Reagan does what he vows he'll do -- the 1987 tax bill will be vetoed into oblivion, and you'll be stuck with last year's Byzantine mortgage rules. Here's a quick overview of what's happening on Capitol Hill, and how it could directly touch you by Thanksgiving:
The House Ways and Means Committee's Democratic majority wrote and passed a $12 billion tax bill last week. What's significant about it for an estimated 15 million American homeowners is that it streamlines the mortgage deductibility issue. It also imposes the first federal ceiling (albeit a towering one) on overall writeoffs on any single family residence.
The bill, expected to be approved by the full House, throws tax reform's mortgage-deduction formula out the window. Last year's law imposed the following easy-to-grasp rule: A homeowner closing a new mortgage loan or refinancing an existing principal residence after Aug. 16, 1986, can henceforth never deduct interest on mortgage amounts in excess of the original cost of the dwelling, plus the cost of capital improvements, plus the dollar amount of any qualified educational or medical expenses, up to the current market value of the home.
All other homeowners can deduct interest only up the amount of their mortgage indebtedness as of Aug. 16, 1986, plus subsequent capital improvements and qualified medical and educational expenses, up to the value of their home.
Got that? When the Internal Revenue Service translated those two sentences into a federal tax form, it took four pages of fine-print instructions plus another two pages of lines and boxes. Don't laugh. IRS Form 8598 is scheduled to turn up in your mailbox sooner than you think. The handful of taxpayers who have seen it have gotten sick. Or angry -- since every homeowner is going to have to go through the Form 8598 gauntlet next spring to claim his or her once-automatic mortgage writeoffs.
The Ways and Means Committee bill tries to address this in two ways. First it establishes a $l million limit on total mortgage debt that qualifies for interest deductions. You can borrow up to $1 million to "acquire" or "substantially improve" your residence -- a limit that should only ruffle feathers in Beverly Hills, if indeed anywhere. For the vast bulk of American homeowners, the new cap would be academic.
The bill would also impose a new, simplified limit on home-equity borrowing for purposes other than acquisition or substantial improvement of a home. Joint-filing couples could write off interest payments on up to $100,000 of debt secured by their home, for any purpose whatsoever. Taxpayers filing singly could deduct interest on up to $60,000. The key change here is that the $100,000 (or $60,000) need not be for qualified educational or medical expenses. It can be for anything you like -- vacations, cars, furniture, charge account consolidations and other items.
The borrowing could also be for educational or medical purposes, of course. You just wouldn't have to follow the current detailed federal regulations on what is and what is not a true, deductible "medical" purpose, or what is truly an "educational" purpose.
The House measure also prohibits loan-interest deductions on boats or mobile homes used on a "transient" basis as second homes.
That's the gist of the pending House bill for homeowners. On the opposite side of Capitol Hill, the Senate Finance Committee last week declined to include the House's mortgage changes in its tax bill. But sources close to both committees suggest the Senate could accept the House's streamlined new deduction approach in a final, compromise measure, probably without the $1 million cap on luxury homes.
Where's all this headed? Keep tuned. The president insists he'll veto any tax bill. But the Gramm-Rudman budget-reduction law will require billions of dollars of defense and domestic-program spending cuts beginning Nov. 20. Reagan abhors the Pentagon cuts, and Democrats in both houses don't want social programs slashed.
It's the old, time-tested Capitol Hill game of chicken being played again. This time, though, the size of your future mortgage deductions may well depend on who blinks first.