Reply to We're doing a mortgage refi at 3.75% -- someone tell me why that interest should be deductible?

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[quote=Anonymous]The mortgage interest break should be a credit and not a deduction, and it should be capped at say, $5,000.

My reason for arguing this is if you're going to have a subsidy for housing, it makes more sense to make it more available lower down the income scale rather than concentrate its benefit at the higher end.

That's not intended to be a 99%/1% comment, rather a practical observation.

Right now it's possible at today's interest rates to buy a starter home in much of the country and get no benefit at all from the mortgage interest deduction, simply because the interest and taxes you pay aren't enough to allow you to itemize your deductions.

Say you buy a $200,000 home in the state of Tennessee. That buys you a lot of house in much of Tennessee. The monthly interest payments at 3.75 are $926, but $300 of that is principal reduction (and not deductible). Even if you assume taxes are $200 a month, you're still looking at only a deduction worth $825 per month, or $9,900. Tennessee has no income tax so there's nothing else to deduct there. The IRS standard deduction is $11,900 for 2012, which is more than the interest and taxes total. So, the taxpayer claims the standard deduction and gets ZERO benefit from the mortgage interest deduction.

You can see the same scenario play out around the country, not only in the states with no income tax (Texas, Wyoming, Florida, Nevada, Washington, Alaska), but also where you might buy homes for $125,000 or so and have a perfectly nice house.

Back to the original example. If you trade the deduction for a credit, then the hypothetical taxpayer gets to subtract $5,000 from their total federal tax bill AND claim their standard deduction.

The flip side is people around here, who routinely deduct $50,000 a year in interest resulting in a tax savings of around $15,000, would see a $10,000 per year tax increase.

The reason I think it's good policy is it would help the housing recovery. It may not be great TAX policy per se, but I argue that if you're going to have a housing tax subsidy, it's better to structure it this way.[/quote]

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