Is the Mortgage Tax Deduction Still Relevant?

The mortgage tax deduction is one of the benefits that many homeowners enjoy. It helps them put more money in their pockets each year when they get their taxes done. But lately, there are many people in the federal government who have wanted to do away with this tax deduction and it has been a topic of much discussion. It is even in the president’s latest plan to reduce the deficit.

The mortgage tax deduction has been around since 1913 when Congress passed a bill that made the interest on any type of loan tax deductible. At the time, the tax code allowed for the first $3000 of income for individuals and $4000 for married couples to be excluded. Only about one percent of the population qualified for that deduction. Also, most home buyers paid for homes upfront during that era rather than taking out a mortgage, which meant fewer people took advantage of this deduction. It wasn’t until the Tax Reform Act of 1986 when the deduction applied specifically to the interest on mortgage loans.

There are more than 35 million homeowners in the United States who claim the mortgage deduction on their taxes each year. As a result, the deduction is projected to cost more than $130 billion in 2012. But despite its cost, many proponents of the mortgage tax deduction say it is good for the economy and the housing market. They say it stimulates home ownership and it is a great incentive for people to move from renting a home to buying one.

But opponents of the mortgage tax deduction disagree. They say that the deduction does not stimulate home ownership and they cite the fact that countries like Australia and Canada do not have a mortgage deduction and they still have a comparable number of homeowners, if not more, than the United States.

A recent study showed that the mortgage deduction can also hurt the housing market and the economy in general. In areas where the home inventory is constrained, the deduction can cause the housing prices to increase because it is factored into the price of the home. As prices increase on these homes, it makes it less likely for them to be sold which decreases the number of people becoming homeowners.

Opponents of the deduction have other reasons for not liking the deduction. Only about 33 percent of the taxpayers who itemize on their tax returns are eligible for the mortgage deduction and those who are eligible tend to be the more affluent homeowners. About 20 percent of the taxpayers who had an income over $75,000 a year received 60 percent of the financial benefits from the mortgage deduction. Compare that to about 23 percent of taxpayers reporting less than $40,000 income who received less than 10 percent of the financial benefits from the deduction.

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