If you’ve been worrying about the possible loss of your mortgage interest deduction, stop it. In fact, it looks like the folks on Capitol Hill might be ready to give some homeowners yet another tax break.
First a little background. On Nov. 1 when the President’s Advisory Panel on Tax Reform suggested axing this beloved deduction, you could hear the screams of real estate professionals, bankers and homeowners across America. If you don’t believe me, check out my colleague Holden Lewis’s observations on this reaction in his blog Mortgage Matters.
No one in these groups wanted to consider in the least the reasons the panel offered for the proposal:
- That the deduction is a generous tax subsidy that encourages overinvestment in housing at the expense of other areas of the economy.
- That housing tax preferences go beyond simply helping increase homeownership or assisting people in purchasing their first home.
- That residential tax breaks are not shared equally among taxpayers, but instead favor higher-income filers who itemize deductions.
And there’s no way in the world that you could persuade these folks to even glance at the Panel’s proposed alternative, a credit available to all taxpayers, no itemizing necessary, that is equal to 15 percent of interest paid on a principal residence. The credit, argues the Panel, would encourage home ownership, not simply the acquisition of big homes that more and more of us go deeper into mortgage debt to buy because, we rationalize, we can deduct the interest (along with interest on subsequent home equity loans, as well as the property taxes on our houses, which the Panel also says should go). Time for a confession here: I'm one of the "we can deduct it" folks with a house that, although we've filled it pretty much up, is larger than we honestly need.
Realistically, from the minute the Panel’s report hit the street, the chances were slim to none that the mortgage interest and other tax-favored residential deductions would be eliminated. Come on. Where have you been for the last, oh, ever!? Congress is comprised of men and women who depend upon the votes of homeowners, a generally active electoral group, as well as the campaign contributions of special interests that tend to oppose changes to existing (and profitable for them) portions of the tax code.
And now, yet another tax concession to homeowners is in the making. But at least this time, the spreading of the tax-break wealth might be a little more inclusive.
Kenneth Harney, in his column published today in Realty Times, says his “Capitol Hill sources say the prospects are good that pending federal tax legislation will allow mortgage insurance tax deductions when it goes to the President's desk before the end of the year.”
In essence, the legislation would classify private mortgage insurance (PMI) as residential mortgage interest, thereby making it deductible. The proposal has some limits. You could fully write off government or PMI premium payments if you make $100,000 (whether married or single) or less. Earn more, and your deduction would be phased out based on your income. Supporters of the legislation and its income limit say it would help lower-income home buyers, because they usually are the folks who don’t have enough money for a substantial down payment that would negate their lender’s PMI requirement.
The measure also would apply only to PMI payments made on new loans issued in 2007 (to reduce the cost to the federal treasury from the added deductions) and it would be effective for only that year, although Congress could always vote to extend it on a year-to-year or permanent basis.
The PMI provision is only in the Senate tax bill (Section 404 of S. 2020) that’s already been passed. The House will take up its tax measure, without the PMI clause, in early December. When House and Senate conference committee members eventually meet to reconcile their two tax bills, PMI deductibility will be discussed and possibly make into the final legislation that could become law.
Congress has tried in prior sessions to pass a PMI deduction bill, but those efforts were broader in scope. If this latest measure to expand homeowner tax breaks, limited though it may be, is approved, do you really think Congress will turn around and take away other, already entrenched, ones? If so, e-mail me because I want to tell you more about this little piece of Florida swamp land I can get you a good deal on.
Addendum: This post was chosen to be part of the 25th Carnival of Personal Finance. Check it out to see what money topics are on the minds of my fellow financial bloggers.