WDYT: RE fiscal cliff and mortgage interest deduct

[Deleted]

What do you think about the idea of getting rid of some of the deductions like the mortgage interest deduction or capping the total amount that a person can deduct in lieu of raising marginal rates?

****

From the WaPo:

Limiting tax deductions

By Editorial Board, Published: November 10

AS THE FISCAL cliff looms, leaders in Washington draw red lines. President Obama is “asking the wealthiest to pay a little more in taxes,” as he repeated Friday. House Speaker John A. Boehner is “open” to more revenue but only in exchange for significant spending cuts — and raising existing tax rates is “unacceptable,” the Ohio Republican insisted.

So, more gridlock? Not necessarily. There are politically feasible ways to get more revenue, mostly from the wealthy — without raising tax rates. One is to limit the value of itemized deductions, 80 percent of which accrued to the top 20 percent of taxpayers in 2011, according to the Tax Policy Center. More than 25 percent of the benefits flowed to the top 1 percent.

There are a number of ways this could be done. You could eliminate or cap particular deductions, such as the mortgage interest deduction to the tune of $80 billion per year. You could reduce the maximum marginal rate at which taxpayers can claim deductions, as Mr. Obama proposed in his first-term budgets.

Or, as Mitt Romney suggested during the campaign, you could limit the total dollar amount of deductions any taxpayer could claim. This idea failed to achieve Mr. Romney’s ostensible purpose: offsetting the trillions of dollars in new tax cuts, mostly for the well-to-do, that he proposed elsewhere. But considered separately, as a potential revenue raiser in a broader budget deal, the notion has promise.

If, for example, Congress kept existing tax rates, including the top rate of 35 percent, while capping itemized deductions at $50,000, the result would be $749 billion in additional revenue over 10 years, according to the Tax Policy Center. That is consistent with Mr. Boehner’s no-rate-increase red line and delivers a total tax increase similar to the $800 billion one he entertained in the failed negotiations of 2011. (More revenue from other sources would also be necessary, in our view.)

Meanwhile, nearly 80 percent of the extra revenue generated by the $50,000 cap would come from the top 1 percent of the income structure — enabling the president and his fellow Democrats to strike their promised blow for tax fairness.

An added benefit would be that economic decisions would be based more on market forces than on tax considerations. Raising revenue through a high deductions cap also might minimize political resistance, since it leaves most tax breaks in place for most people. There would be pushback from charities that depend on donations from the wealthy, and from high-tax states that rely on state and local tax deductions. But assuming legitimate issues can be addressed, capping deductions could be part of a red-blue compromise.

[Some Funny Name]

One is to limit the value of itemized deductions, 80 percent of which accrued to the top 20 percent of taxpayers in 2011, according to the Tax Policy Center. More than 25 percent of the benefits flowed to the top 1 percent.

I think that I will be extremely pissed of they eliminate the one of the largest deduction for middle-class Americans without addressing the numerous deductions and loopholes that allow the above statements to be true.

[winemaker06]

While I agree with sutnam as a whole, I think that if you're affected by a $50,000 cap on deductions actually suggested here, you're not middle class.
Yea it would hurt, but if I made the money to support the type of expenses that means I can deduct that much, I'd pay it with only a little complaining.

[noodleoo]

Nov 12, 2012 16:08:31 GMT -5 Some Funny Name said:

One is to limit the value of itemized deductions, 80 percent of which accrued to the top 20 percent of taxpayers in 2011, according to the Tax Policy Center. More than 25 percent of the benefits flowed to the top 1 percent.

I think that I will be extremely pissed of they eliminate the one of the largest deduction for middle-class Americans without addressing the numerous deductions and loopholes that allow the above statements to be true.

Agree with this. I think this would wreak havoc on the already limping along housing market. The tax deduction is one of the primary motivators for people to buy in my area (MA). We are HCOL so that deduction is huge. I know a lot of people who would take a huge hit if that deduction went away. And they aren't the 1%.

ETA: oops, missed the part about the $50K cap on deductions. That's okay then.

[pamela]

I agree with it if it's part of a massive overhaul of simplifying the tax code so that the average citizen can do their own taxes properly. Just picking individual deductions to eliminate is just raising taxes, I don't care what the particular deduction is.

[Deleted]

Nov 12, 2012 16:26:28 GMT -5 noodleoo said:

Nov 12, 2012 16:08:31 GMT -5 Some Funny Name said:

One is to limit the value of itemized deductions, 80 percent of which accrued to the top 20 percent of taxpayers in 2011, according to the Tax Policy Center. More than 25 percent of the benefits flowed to the top 1 percent.

I think that I will be extremely pissed of they eliminate the one of the largest deduction for middle-class Americans without addressing the numerous deductions and loopholes that allow the above statements to be true.

Agree with this. I think this would wreak havoc on the already limping along housing market. The tax deduction is one of the primary motivators for people to buy in my area (MA). We are HCOL so that deduction is huge. I know a lot of people who would take a huge hit if that deduction went away. And they aren't the 1%.

ETA: oops, missed the part about the $50K cap on deductions. That's okay then.

I agree that if you're deducting $50k you're most likely not MC. I'm reading that a lot of people on both sides of the aisle are finding Romney's proposal of capping it at 17k attractive though (minus the part about lowering marginal rates at the top of course). I'll be interesting to see what kind of deal they can work out.

[audette]

I think it's worth considering other items, either in place or, or in addition to upping the marginal tax rates.

One first thought, I kinda like the idea of setting a maximum allowed to be deducted for those in the highest brackets (the $50k mentioned in the article). I can't imagine that will impact too many middle class folks, so it meets with the ideals Obama is promoting, and as it was originally proposed by Romney, it might be easier to negotiate thru to being finalized.

[Susie]

One concern of mine is that if total deductions are capped, how will that affect entities that rely significantly on charitable giving for funding? If wealthier Americans max out their deductions between state income tax, property taxes, and mortgage interest, there's potentially less likelihood to make charitable donations. I might rather see a cap on mortgage interest deductions than a cap on total deductions, to deal with that potential consequence.

[barefootcontessa]

Nov 12, 2012 16:37:11 GMT -5 Susie said:

One concern of mine is that if total deductions are capped, how will that affect entities that rely significantly on charitable giving for funding? If wealthier Americans max out their deductions between state income tax, property taxes, and mortgage interest, there's potentially less likelihood to make charitable donations. I might rather see a cap on mortgage interest deductions than a cap on total deductions, to deal with that potential consequence.

Agree. We are under $250K HHI and those three items total $50K for us. Not having a deduction would affect our giving decisions, no doubt.

[aurora]

Nov 12, 2012 16:37:11 GMT -5 Susie said:

One concern of mine is that if total deductions are capped, how will that affect entities that rely significantly on charitable giving for funding? If wealthier Americans max out their deductions between state income tax, property taxes, and mortgage interest, there's potentially less likelihood to make charitable donations. I might rather see a cap on mortgage interest deductions than a cap on total deductions, to deal with that potential consequence.

I think this is a really good point, but I also hate that the mortgage interest tax deduction is so often singled out.

[Deleted]

Nov 12, 2012 16:26:22 GMT -5 winemaker06 said:

While I agree with sutnam as a whole, I think that if you're affected by a $50,000 cap on deductions actually suggested here, you're not middle class.
Yea it would hurt, but if I made the money to support the type of expenses that means I can deduct that much, I'd pay it with only a little complaining.

This.

We'd probably get hit, but barely. Our mtg interest keeps going down, however, we don't have high property taxes or income tax to deduct from our return

[lys]

Phase out deductions by income
We HAVE to raise income and REDUCE debt and this seams reasonable to me.

[ESF]

Nov 12, 2012 16:08:31 GMT -5 Some Funny Name said:

One is to limit the value of itemized deductions, 80 percent of which accrued to the top 20 percent of taxpayers in 2011, according to the Tax Policy Center. More than 25 percent of the benefits flowed to the top 1 percent.

I think that I will be extremely pissed of they eliminate the one of the largest deduction for middle-class Americans without addressing the numerous deductions and loopholes that allow the above statements to be true.

Mortgage deductions are included in the itemized deductions described in the part you bolded.

The vast majority of people taking advantage of the mortgage interest deduction are very high earners.

I agree with pamela (WTF?) that I think the mortgage deduction should be on the table if it's part of an overall tax overhall, but I'm less thrilled with going after it in isolation.

That said, I'm not horrified by some kind of compromise, like you can only deduct up to X amount of interest per year.

But I'm a renter, so I stand to benefit from the deduction falling apart, since it'll mean home prices will drop. :Y:

[80sjunkie]

I am not for eliminating the mortgage interest deduction but capping it makes sense. Perhaps even limiting it to your resident and not a vacation home would be another way to tax the wealthy.

[Susie]

The student loan interest deduction is capped in 2 ways, both the amount you can deduct and an income cap for deducting anything. IMO, it's pretty stingy. I have never really understood why SL interest and mortgage interest are treated so differently by the tax code. I am able to deduct all of my mortgage interest, but none of my SL interest.

I would be happy to see the caps on SL interest relaxed some, and caps introduced on mortgage interest. It'd likely be a wash for me personally, but I think it would shift the balance on tax liability in a good direction.

I'm not sure where the levels would be that it'd result in at least a modest net revenue increase, but I'm sure someone smarter than me could figure it out.

[sillygoosegirl]

I thought the AMT already limits deductions for upper income earners. I don't pay it though, so I don't know much about it. Maybe one of the big dogs on this board could shed some light on it?

I'm for eliminating the mortgage interest deduction. At current interest rates, you need a mortgage of more than $200K to get the deduction. Your typical American family can't afford that big of a mortgage anyway. Also, I don't think the government should encourage people not to pay off their homes.

I'm also for raising taxes in a lot of other areas too. Especially would like to see the payroll tax cap removed.

[ondaflipside]

Nov 12, 2012 17:32:20 GMT -5 aurora said:

Nov 12, 2012 16:37:11 GMT -5 Susie said:

One concern of mine is that if total deductions are capped, how will that affect entities that rely significantly on charitable giving for funding? If wealthier Americans max out their deductions between state income tax, property taxes, and mortgage interest, there's potentially less likelihood to make charitable donations. I might rather see a cap on mortgage interest deductions than a cap on total deductions, to deal with that potential consequence.

I think this is a really good point, but I also hate that the mortgage interest tax deduction is so often singled out.

Yeah, a mortgage interest cap would definitely hurt us. Our mortgage interest last year was roughly $10K. Our property taxes are already $3K. But we definitely do other deductions, but the mortgage interest is pretty high up there.

If it's a $50K cap, I believe we should be okay in the next few years, but if it gets lower, then that's a problem. If businesses like my employers cut back on charity giving for other reasons as it is, I'm sure households will do the same, if it comes down to it, because of the lack of taxable deduction benefits.

DH and I are lower middle class, and I'm pretty sure we represent the majority.

[ondaflipside]

Nov 12, 2012 16:05:00 GMT -5 @lcap said:

What do you think about the idea of getting rid of some of the deductions like the mortgage interest deduction or capping the total amount that a person can deduct in lieu of raising marginal rates?

****

From the WaPo:

Limiting tax deductions

By Editorial Board, Published: November 10

AS THE FISCAL cliff looms, leaders in Washington draw red lines. President Obama is “asking the wealthiest to pay a little more in taxes,” as he repeated Friday. House Speaker John A. Boehner is “open” to more revenue but only in exchange for significant spending cuts — and raising existing tax rates is “unacceptable,” the Ohio Republican insisted.

So, more gridlock? Not necessarily. There are politically feasible ways to get more revenue, mostly from the wealthy — without raising tax rates. One is to limit the value of itemized deductions, 80 percent of which accrued to the top 20 percent of taxpayers in 2011, according to the Tax Policy Center. More than 25 percent of the benefits flowed to the top 1 percent.

There are a number of ways this could be done. You could eliminate or cap particular deductions, such as the mortgage interest deduction to the tune of $80 billion per year. You could reduce the maximum marginal rate at which taxpayers can claim deductions, as Mr. Obama proposed in his first-term budgets.

Or, as Mitt Romney suggested during the campaign, you could limit the total dollar amount of deductions any taxpayer could claim. This idea failed to achieve Mr. Romney’s ostensible purpose: offsetting the trillions of dollars in new tax cuts, mostly for the well-to-do, that he proposed elsewhere. But considered separately, as a potential revenue raiser in a broader budget deal, the notion has promise.

If, for example, Congress kept existing tax rates, including the top rate of 35 percent, while capping itemized deductions at $50,000, the result would be $749 billion in additional revenue over 10 years, according to the Tax Policy Center. That is consistent with Mr. Boehner’s no-rate-increase red line and delivers a total tax increase similar to the $800 billion one he entertained in the failed negotiations of 2011. (More revenue from other sources would also be necessary, in our view.)

Meanwhile, nearly 80 percent of the extra revenue generated by the $50,000 cap would come from the top 1 percent of the income structure — enabling the president and his fellow Democrats to strike their promised blow for tax fairness.

An added benefit would be that economic decisions would be based more on market forces than on tax considerations. Raising revenue through a high deductions cap also might minimize political resistance, since it leaves most tax breaks in place for most people. There would be pushback from charities that depend on donations from the wealthy, and from high-tax states that rely on state and local tax deductions. But assuming legitimate issues can be addressed, capping deductions could be part of a red-blue compromise.

Can someone explain what this means?

[imojoebunny]

There could be an unintended consequence to this, higher rents. We deduct tens of thousands in interest and property taxes, most of the interest we pay is on rental properties we own, as our own home has low interest and not a big loan. We supply housing to 10 people. If we lose that deduction, we will have to sell our rentals or raise rents to cover the additional cost, which would be a lot. I know a lot of people in our boat, not 1% people, but well off people who have a few apartments or homes they rent as investments. Losing that deduction would have an impact.

I am sure there are things the very rich could do to get around it, like incorporate or whatever, but for simple investors who just want a tangible investment they can see and care for on the side, they would lose because all the fees to do that are not worth it for relatively small returns.

[jwright]

As a CPA, I am terrified of the fiscal cliff. This subject gives me such heartburn. We are going to have a very rough tax season. And we can't even plan!

We already have the Healthcare reform taxes going into affect; the Bush tax cuts potential for expiration and possible reduced deductions.

The majority of my clients will be paying 50% marginal rates with federal and state taxes combined if the top rates are increased before payroll tax, sales tax and property tax.

[jwright]

Nov 12, 2012 17:58:39 GMT -5 imojoebunny said:

There could be an unintended consequence to this, higher rents. We deduct tens of thousands in interest and property taxes, most of the interest we pay is on rental properties we own, as our own home has low interest and not a big loan. We supply housing to 10 people. If we lose that deduction, we will have to sell our rentals or raise rents to cover the additional cost, which would be a lot. I know a lot of people in our boat, not 1% people, but well off people who have a few apartments or homes they rent as investments. Losing that deduction would have an impact.

I am sure there are things the very rich could do to get around it, like incorporate or whatever, but for simple investors who just want a tangible investment they can see and care for on the side, they would lose because all the fees to do that are not worth it for relatively small returns.

The mortgage interest deduction as a rental expense is not on the table as far as I know. Just primary (and second home) residence.

[Susie]

Nov 12, 2012 17:54:49 GMT -5 sillygoosegirl said:

At current interest rates, you need a mortgage of more than $200K to get the deduction. Your typical American family can't afford that big of a mortgage anyway.

Sidebar, how are you coming up with this $200k number?

Everybody I can think of who deducts mortgage interest, can also deduct property taxes and state income tax. Those things play at least as big a role as mortgage interest in determining whether you itemize or not, and they vary hugely by state. I can't imagine how you'd come up with a national number for mortgage size in order to "get" a mortgage interest tax deduction.

[jwright]

Nov 12, 2012 17:54:49 GMT -5 sillygoosegirl said:

I thought the AMT already limits deductions for upper income earners. I don't pay it though, so I don't know much about it. Maybe one of the big dogs on this board could shed some light on it?

I'm for eliminating the mortgage interest deduction. At current interest rates, you need a mortgage of more than $200K to get the deduction. Your typical American family can't afford that big of a mortgage anyway. Also, I don't think the government should encourage people not to pay off their homes.

I'm also for raising taxes in a lot of other areas too. Especially would like to see the payroll tax cap removed.

You still get to deduct mortgage interest if you are in AMT. The slight difference is that you are allowed to deduct interest on a home equity line up to $100,000 (principal amount). For regular tax you could use the home equity line for anything you want and still deduct the interest. For AMT, the home equity line has to be used for home acquisition or improvements. So in theory part of your interest deduction could be limited but not a huge difference.

[biscoffcookies]

Question: if the Bush tax cuts expire at the end, do they have retroactive effect? I thought they expired on the 31st, so I would have thought that that just meant everyone pays the "normal" taxes on their 2012 returns and that the increases in taxes wouldn't kick in 1/1/2013. Wrong?

[Deleted]

I'd be fine getting rid of it for second properties, like vacation homes. If You can afford a vacation home, you can afford the interest. And vacation homes were one of the drivers behind the housing bubble.

With mortgage rates so low, I wonder if there is wiggle room on getting rid of this tax credit? It wasn't a huge motivating factor for us, and with a rate of 4%, even in year 3 of a 30 year mortgage, I think our tax credit was less than $500?

Side note: my parents bought one of those vacation homes in 2005. They financed $450k at 6.5% on a balloon payment and ARM ( lol, remember those days!?). They initial 5 year ARM expired and rather than refinance they're paying the current ARM rate of 2.9%! It can't reset by more than 2% in a year, so if interest rates start creeping up they'll refi then. They've dumped about $200k into paying down the principle. They got lucky!

[ondaflipside]

Nov 12, 2012 19:22:37 GMT -5 biscoffcookies said:

Question: if the Bush tax cuts expire at the end, do they have retroactive effect? I thought they expired on the 31st, so I would have thought that that just meant everyone pays the "normal" taxes on their 2012 returns and that the increases in taxes wouldn't kick in 1/1/2013. Wrong?

I believe that's correct.