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Time To Cancel The Mortgage Interest Deduction

December 30th, 2010

For millions of Americans the only good thing about tax season is the ability to take advantage of the Mortgage Interest Deduction (MID). For high income earners it’s like Christmas in February. But for the poor, it’s the same old story. They don’t make enough money to really get back a big chunk of money.

For example, if a homeowner is single and makes around $40,000 he would be in the 25% tax bracket. Based on income his maximum mortgage would be about $120,000. Using an interest rate of 4.5% his tax deduction would be $5,360.40 in the first year. But because he is the 25% tax bracket his real benefit is $1,340.10. What about his counterpart, the high income earner with the McMansion?

The cards are stacked in favor of the earners in the 35% tax bracket.  This individual would be making $373,650 plus a year. He would easily qualify for a mortgage of about $750,000. His tax deduction in year one would be $33,502.48. His actual tax benefit would be $11,725.86 because he is in the 35% tax bracket.

The main objection I have to the Mortgage Interest Deduction plan is that it is costing the taxpayers over $131 billion. This tax bill is shouldered by ALL taxpayers, not just the ones that benefit from MID each and every year.

My second objection is that the program allows the taxpayer to refinance and start at year one where he gets the biggest bang for his buck. Year one is where the biggest deduction occurs. As your principal gets smaller so does the tax deduction. So to abuse the system a homeowners can refinance every three or four years.

So what is the solution? I would suggest that we can give a $5,000 mortgage interest deduction to every taxpayer. This includes those who are renters. So in our examples above, the wealthy homeowner in the 35% tax bracket would get a benefit of $1,750. The average guy in a 25% tax bracket would get a tax benefit of $1,250.

We can expect the various realtor groups to object to any changes. They would like to keep the status quo.

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Entry Filed under: Mortgage Interest Deduction