The fiscal year 2011 budget submitted to Congress this week by the Obama Administration caps the value of itemized deductions based on income, effectively eliminating the mortgage interest deductionfor single taxpayers making more than $200,000 a year , $250,000 for joint returns.
The cap on itemized deductions, designed to raise nearly $179 billion next year by increasing taxes on wealthier Americans, mirrors a similar effort last year. It sparked an aggressive lobbying campaign from the housing lobby and financial services interests, and was eventually stricken from the 2010 budget in Congress.
The new budget includes a triple whammy on upper income taxpayers. In addition to the limits on itemized deductions, the tax cuts imposed during the Bush Administration will expire for families earning over $250,000, raising $338 billion. An increase in the capital gains tax will raise another $118 billion.
The new budget appears to have caught housing groups by surprise. To date, only the Mortgage Bankers Association has attacked the new budget proposal. MBA said it would have a negative impact on the housing market, particularly in high-cost states such as California and New York, as it would increase the cost of mortgages for many potential homeowners, especially in high-cost states.
“What you’re doing is disadvantaging the mortgage relative to other usages of money, so they may decide to reduce mortgages or pay off the house rather than make other investments conducive to the economy, such as the stock market,” said Jay Brinkmann, MBA’s chief economist.
More than 100 years old, the mortgage interest deduction allows homeowners to deduction from their taxable income the value of interest paid on their mortgage. In addition to the US, the Netherlands, Sweden, Switzerland allow mortgage interest to be deducted.
Critics of the deduction argue that only about half claim the deduction. For the 37 million individuals and couples who do, the rewards go to the wealthy who need it least. On average, homeowners receive just under $2,000 per return. On a million-dollar mortgage, however, the tax benefit is worth approximately $21,000 a year. The deduction costs the Treasury more than $80 billion a year.