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Mortgage Interest Deduction (MID)

Homeowners who don't itemize their federal income tax deductions still benefit from the tax advantage of mortgage interest.

The federal mortgage interest deduction, known as "the MID," is one of the greatest means to encourage homeownership and promote healthy housing markets not only in Virginia, but throughout the nation. That's why all homeowners, including those who don't take the deduction, should be concerned about recent proposals in Washington, D.C., to cut back this important benefit.

The scenarios most commonly mentioned include caps on value of the deduction, limitation to mortgages on a single property, and elimination of deductibility of equity lines. Others in Congress may well have differing proposals. It is suspected that the recent Republican budget proposal, while now vague, will likely have a form of MID reduction. The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years. In a new survey commissioned by the National Association of REALTORS® (NAR) and conducted online in October 2010 by Harris Interactive of nearly 3,000 homeowners and renters, nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.

Recent progress has been made in bringing stability to the housing market and any changes to the MID now or in the future could critically erode home prices and the value of homes by as much as 15 percent, according to NAR research. This would negatively impact home ownership for millions of Americans, including those who own their homes outright and have no mortgage.

Homeowners who don't have a mortgage or don't itemize their federal tax deductions might well question the MID's value. After all, if you own your home free and clear, you don't pay any mortgage interest that you can deduct, and if you take the standard deduction in lieu of itemizing, any mortgage interest you pay won't affect your tax bill.

But the fact is that homeowners who don't take the MID still benefit from it. That's because the MID makes owning a home more attractive to more people, creating more demand and increasing home sales and prices. The National Association of REALTORS® estimates that home values nationwide would decline 15 percent if the MID were curtailed or, worse yet, eliminated. That would hurt all homeowners, whether or not they use the MID themselves.

The question of whether to take the standard deduction or itemize is a complicated one with many moving parts and considerations. Generally speaking, however, taxpayers should itemize if their itemized deductions exceed the standard deduction they're entitled to claim.

The standard deduction depends on the taxpayer's filing status, age, disaster losses, state excise taxes and several other relatively infrequent factors. For the 2010 tax year, the standard deduction is $5,700 for single taxpayers and $11,400 for married taxpayers filing jointly, according to the IRS. Being a head of household, older than 65 or blind raises that amount.

Itemized deductions depend on the taxpayer's expenses, including residential mortgage interest, property taxes, state income taxes, uninsured medical and dental expenses, unreimbursed employee business expenses, uninsured casualty or theft losses, and contributions to charities, among other items. All deductions are subject to rules, limitations and restrictions.

The standard deduction is easier to use. But a little math demonstrates the value of the MID: if you pay, say, $1,000 a month in mortgage interest and, say, $1,300 a year in property taxes, that would total $13,300 in itemized deductions, or $1,900 more than the standard deduction, resulting in a tax savings of $285 in the 15 percent tax bracket.

Here are the equations:

$1,000 (mortgage interest) x 12 (months) = $12,000

$12,000 + $1,300 (property tax) = $13,300

$13,300 - $11,400 (married-couple standard deduction) = $1,900

$1,900 x 0.15 (tax bracket) = $285

Additional deductions would result in more savings.

Only 30 percent of taxpayers itemize their deductions in a typical year, but more than three-quarters of homeowners utilize this method, 80 percent of them taking advantage of the MID.

The President's Commission on Fiscal Responsibility and Reform, known as the Deficit Commission, in its December 2010 report, recommended that the MID be repealed, capped, eliminated for second homes or turned into a tax credit. None of those alternatives would be better for homeowners than the MID in its current form. And now, yet another Congressional commission is being organized to take yet another look at ways to reduce the federal debt, meaning the MID continues to be in danger.

That's why the Virginia Association of REALTORS® stands in opposition to any changes in the mortgage interest deduction.

REALTORS® defend mortgage interest deduction

Tampering with this tax provision would hurt homeowners, depress home values and slow the nation's economic recovery.

The federal mortgage interest tax deduction is one of the most valuable financial benefits of owning a home. That's why it's discouraging to see the deduction is once again under attack in Washington, D.C.

The mortgage interest deduction, known as the "MID" in REALTOR® shorthand, is one of the few items in the U.S. Tax Code that helps ordinary people. It's not a business tax break. It's not a tax shelter for the wealthy; nor is it primarily a helping hand for low-income households. It's a basic tax incentive that encourages homeownership and makes owning a home more affordable for families and individuals throughout the country.

The current rules allow federal taxpayers to deduct mortgage interest they've paid on mortgage debt of up to $1 million on a main home and one additional residence. Mortgage interest on up to $100,000 of debt on one or more home equity loans or lines of credit also can be deducted.

The latest proposal, from the Obama Administration, would convert the MID into a 28 percent tax credit for taxpayers in the highest tax brackets. People who earn less than $250,000 generally wouldn't be affected by this change. Other proposals would turn the MID into a 12 percent non-refundable tax credit, cap the mortgage amount at $500,000 or eliminate the use of the MID for second homes or home equity loans and credit lines.

The Virginia Association of REALTORS® shares the National Association of REALTORS®' belief that changing the MID would harm the nation's homeowners and the U.S. economy. Home sales and prices would decline, though perhaps not as precipitously as some fear-mongers have suggested.

Tampering with the MID at this critical time also could threaten the U.S. housing market's emerging recovery, according to NAR 2010 President Ron Phipps, a real estate broker in Rhode Island.

"Recent progress has been made in bringing stability to the housing market," Phipps remarked in a press statement at the end of last year. "Any changes to the MID, now or in the future, could critically erode home prices and the value of homes by as much as 15 percent, according to our research. This would negatively impact home ownership for millions of Americans, including those who own their homes outright and have no mortgage."

Only 30 percent of U.S. taxpayers itemize their deductions in any given year, but that figure underestimates the reach of the MID since more than three-quarters of homeowners who have a mortgage take advantage of the mortgage interest deduction every year.

In Virginia, the state income tax is based on the taxpayer's federal adjusted gross income, which means the MID reduces Virginians' state taxes as well as what they owe the federal government. The state tax break not a huge benefit to most people since the state has a relatively low income tax rate, but it's still significant.

The MID has withstood plenty of unwarranted or ill-informed criticism since it was adopted more than 80 years ago. Time and time again, wiser heads have prevailed and the deduction has been preserved.

Many members of Congress understand that altering the MID isn't the right course. Still, the threat is real, and homeowners should be aware of the certain adverse consequences of such a foolish mistake.

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