A look at proposals to limit the mortgage interest deduction


WASHINGTON — Limiting the homeowner mortgage interest deduction came up in two of the presidential debates, but specifics about who would be affected and how much they might lose in tax benefits were minimal. To put some rough numbers on the issue, here’s a quick primer on the mortgage interest deduction and related housing write-offs.

How big are they? Very big — which is why they have become such a tempting revenue-raising target for candidates seeking to reduce the massive federal deficit. The mortgage interest deduction alone will cost the federal government $484.1 billion from fiscal 2010 to 2014 — $98.5 billion in 2013 and $106.8 billion in 2014, according to estimates from the congressional Joint Committee on Taxation. Write-offs by homeowners of local and state property taxes account for an additional $120.9 billion during the same four-year period.

Keep in mind that what costs the federal government also represents significant tax savings for the people who take the deductions, in this case the millions of homeowners who save thousands of dollars a year that they are not paying to the Internal Revenue Service. According to a new analysis by Jed Kolko, chief economist for the real estate information site, among those taxpayers who itemize on their federal returns, 49% of total write-offs are housing-related — primarily mortgage interest and local property taxes. For homeowners as a group, this is a big deal.

But since only about one-third of taxpayers itemize on their returns — the rest opt for the standard deductions — who’s really getting these tax savings? As you might guess, people who have higher incomes are more likely to itemize and claim mortgage interest and other housing deductions. Citing the latest data on the subject, published by the IRS in 2009, Kolko found that only 15% of households with incomes below $50,000 took itemized deductions, while 65% of those with incomes between $50,000 and $200,000 did. Just about everybody with incomes above $200,000 — 96% — itemized on their returns.

A $25,000 cap on itemized deductions, as proposed by Mitt Romney in the second debate, would hit many people in the $50,000 to $200,000 income range, Kolko said. It would take a much bigger bite out of upper-income households beyond $200,000, of course, where the average total for all itemized deductions came to $81,000 in the IRS data from 2009. Romney’s plan envisions that the losses in deductions for all categories of taxpayers would be offset by the lower payments they’d be making based on a one-fifth reduction in marginal rates.

President Obama supports a cutback in housing-related and other write-offs for people with incomes above $250,000.

So where do homeowners who claim the biggest mortgage interest deductions — and would be most vulnerable to caps and cutbacks — live? The Tax Foundation, a nonpartisan research group in Washington, D.C., did a study based on the 2009 IRS data and found that there are dramatic differences state by state. As a general matter, residents of states with high housing and tax costs, large average mortgage balances and high household incomes write off the most, states with low housing costs and incomes the least. Any significant cutbacks on deductions would hit the high-cost states the hardest, absent compensating savings from elsewhere in any forthcoming tax code changes.

California ranked No. 1 in the size of home mortgage deductions, with $18,876 on average. Next came Hawaii ($16,730), the District of Columbia ($16,720), Nevada ($15,502), Washington ($14,262), Maryland ($14,162) and Virginia ($14,094). At the opposite end were homeowners in Oklahoma ($7,992), Iowa ($8,104), Nebraska ($8,233), Mississippi ($8,301) and Kentucky ($8,345). Maryland is tops in the percentage of taxpayers taking mortgage interest write-offs (37.5%), followed by Connecticut (34.7%), Colorado (33.7%) and Virginia (33.6%).

What’s the outlook on cutting back deductions? Two of the traditional political guardians of the housing tax benefits — the National Assn. of Realtors and the National Assn. of Home Builders — say they are digging in for battles next year, no matter who wins the presidential election.

“The real debate” on housing deductions, said Jamie Gregory, deputy chief lobbyist for the Realtors, is not on TV between Obama and Romney, but on Capitol Hill next year, where both groups are planning major defenses.

Distributed by Washington Post Writers Group.