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| The Basics | At risk: your home-mortgage deduction
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The president's tax panel proposes sweeping revisions that gore some sacred cows, including the mortgage-interest deduction. Savers and investors get some help.
By Jeff Schnepper
A limit on the mortgage deduction? Oh, my!
A presidential tax reform panel would simplify your taxes by rewarding savings, dumping some deductions and limiting others -- like mortgage interest. Here's what's dead already and what ideas may have some traction.
If youre an investor or a saver, happy days are here to come. However, you're going to be more responsible for your own health care, and housing will take a hit.
That is, if President Bush's Advisory Panel on Federal Tax Reform's recommendations are enacted. The odds of all the recommendations becoming law are low, and for some provisions, the chances are nonexistent.
But keep an eye on the panel's work, because it will become the basis of tax debate for the next two years. It could and probably will affect you.
The Bush tax panel has actually come up with two plans. There's a streamlined income tax system with lower rates that limits or eliminates most deductions and credits. The other would be a progressive consumption tax system that would still require everyone to file an annual return. It looks like the modified income tax is the panel's preferred choice.
Here's a rundown of the panel's big proposals -- and my assessment of whether any have a chance of moving into the tax code.
Alternative minimum tax
The panel recommended abolishing the dreaded alternative minimum tax (AMT).
Created to force higher-income taxpayers with tax shelters and sophisticated deductions from completely avoiding contributing to our tax system, the AMT has now become a middle-class nightmare.
Related news and commentary on MSN Money
In June 2003, the Brookings Institution projected that 43% of taxpayers with incomes between $50,000 and $75,000, and 79% of those earning between $75,000 and $100,000 will be hit by the AMT.
Schnepper's take: This ones a winner!
But it raises an immediate and serious question: How is the government going make up the $1.2 trillion that the AMT is scheduled to generate over the next 10 years?
Heres where the panel wants to get it:
Mortgage interest deduction
The McMansions are gonna go!
Currently, you can deduct the interest paid on a principal home mortgage and on second-home mortgages up to a combined $1 million in loans, and then deduct the interest on another $100,000 in home-equity loans.
The panel voted to lower the limit to the maximum mortgage the Federal Housing Administration would insure, which varies from county to county across the country. Currently, it's between $172,000 and $312,895; the average nationally is about $244,000. The levels change each year. The panel would also eliminate the deduction for interest payments on home-equity loans and second homes.
Of course, there wouldn't really be a deduction at all. Instead, the panel would make home-mortgage interest payments eligible for a 15% credit.
If youre in the more-than-15% bracket (2006 taxable income of more than $39,700 for singles and more than $59,400 on a joint return), this idea will hurt. A $5,000 qualified interest deduction in the 25% bracket saves you $1,250 in tax. A 15% credit only reduces your tax by $750. Youve just lost $500.
If youre in the 10% bracket (2005 taxable income of less than $7,300 for singles and less than $14,600 on a joint return), the credit gives you a 5% bonus tax reduction over a deduction.
Of course, if youre only making $14,600, youre not really in the market to buy a house.
According to former Sen. Connie Mack, R-Fla., the panel chairman, Simplification has driven this. What?!
Talk about complexity. Each county would have its own limit, different from the county next door. And both limits would change each year. Frankly, my dog can come up with a better idea!
But, remember, they're looking for tax dollars to pay for cuts like elimination of the AMT.
Schnepper's take: Aint gonna happen!
At least not in the form presented. However, get ready. The mortgage-interest deduction is going to be limited. The panel understands that the size of the mortgage cap has helped push home prices to record levels in many markets. I wouldnt be surprised to see the $1 million cap on qualified borrowing cut to $300,000 to $500,000, with no deduction for interest on anything other than your principal residence.
Think record federal deficits. Remember, theyre looking for money.
State and local tax deduction
The panel also is recommending eliminating the deduction for state and local taxes.
Think red states vs. blue states. Remember panel chairman Connie Mack? Hes from Florida, where there is no state income tax. Blue states like New York and New Jersey wont be happy. In fact, their congressional delegations are already lobbying against the idea. Reason: Their constituents pay high state and local taxes and incur huge mortgages thanks to high home and apartment prices. If the mortgage-interest deduction is reduced and the state income-tax deduction is eliminated they'll be even more blue.
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