Taxing News for Homeowners
powered by Content that WorksPosted on: March 2017
For the past 104 years, the mortgage interest deduction (MID) has been a popular mainstay of the tax code. But experts say the MID may be less impactful if President Trump and Congress follow through on their plans to usher in tax reform measures.
The MID allows homeowners who itemize their deductions on their federal tax return to deduct any annual interest paid to lenders on a mortgage, thereby lowering their tax rate. Current deduction limits are $500,000 for individual taxpayers or married taxpayers filing separately, and $1 million for married homeowners filing jointly.
Forbes reports that, in 2014, 44 percent of homeowners (66 percent with a mortgage) took advantage of the MID, equating to $308 billion in total deductions. That's no small chunk of change.
Supporters like the National Association of Realtors maintain that the MID encourages Americans to become homeowners because it provides more purchasing power to buy a home and is a boon to the real estate market; many fear that messing with the MID will increase mortgage defaults and foreclosures and set back the real estate recovery. Critics contend, however, that the MID is actually designed to provide bigger tax breaks to the wealthy and is overdue for an overhaul.
While neither the Trump Administration nor House Republicans are proposing to eliminate the MID altogether, as previously feared, Trump’s plan currently calls for limiting all combined itemized deductions to $200,000 for married couples filing jointly and $100,000 for single taxpayers. Also, it would double the standard deduction a filer could take ($30,000 for married couples filing jointly and $15,000 for single filers) instead of claiming itemized deductions; in other words, married homeowners would need to meet a $30,000 minimum threshold in mortgage interest and additional deductions for them to be worth itemizing.
“Reduction of the mortgage interest deduction could have a profound effect on current and future homeowners,” says Jeremy Colonna, vice president/principal of Matchpoint Funding in Los Angeles, who notes that homeowners in larger metropolitan areas like Los Angeles, San Francisco, Seattle, New York City and Washington D.C. would feel a bigger impact if Trump’s tax changes take effect. “Millions of homeowners take this deduction into account when making a decision to purchase their homes. This is akin to changing the rules in the middle of the game.”
Crystal Stranger, a Las Cruces, N.M.-based tax professional and author of “The Small Business Tax Guide,” on the other hand, believes proposed tax changes that affect the MID could be a good thing.
“The mortgage interest deduction benefits less people each year because prime interest rates are low, home prices are relatively low, and the standard deduction is high,” Stranger says. “Those who benefit most are urban residents in high tax states who are also often hit with the alternative minimum tax, which lower the itemized deductions allowed. That means it’s really not much of a tax boon to higher-income taxpayers.”
Stranger says the logic behind the Trump Administration’s plans is to lower overall tax rates and create a simpler and more fairly applied tax system that will most benefit those living in lower-cost areas.
Frank Zaccanelli, CEO/managing partner at Fiamma Partners LLC in Plano, Texas, agrees that these proposed changes shouldn’t negatively affect the lower- and middle-income homeowners.
“I predict that President Trump will change the mortgage interest deduction, so that it doesn’t turn into another tax break for the wealthy, yet preserve it at lower levels so it won’t hurt working families,” Zaccanelli says.
Stranger doubts the MID is in danger of getting scrapped altogether anytime soon.
“Too many people depend on it, and it would hurt the housing industry, which Trump is heavily invested in,” Stranger says.