Mortgage Interest Deduction Could be Capped at 28% Tax Bracket

By Miranda Marquit

February 28th, 2009

On Thursday, President Barack Obama provided a summary of his budget. While full detials have yet to be fleshed out, Congress — and the American people — got a pretty good idea of what President Obama hopes to accomplish. Indeed, he has said that his has a goal to reduce the yearly budget deficit by half by the end of this term in office.

One of the ways that Obama plans to reduce the federal deficit is by raising revenues. He has long said (and Warren Buffett agrees) that the wealthy need to should a little more of the tax burden. One of the ways this may happen is through a new way of figuring mortgage interest deductions on one’s tax return. Obama has suggested that those in the 33% and 35% tax brackets receive a smaller deduction — 28 cents on the dollar, rather than 35 cents on the dollar.

CNN Money reports on the likely effects of a mortgage interest deduction cap:

That would leave people in higher marginal tax brackets of 33% and 35% - the wealthiest Americans - with a smaller benefit from the deduction of mortgage interest, state and local taxes and other items such as charitable contributions.

The move is projected to raise $318 billion over 10 years and fits nicely with the president’s campaign pledge to increase taxes only for families earning more than $250,000. Few, if any middle-income homeowners are in tax brackets of more than 28%.

Dean Baker, co-director of the Center for Economic and Policy Research, a D.C. think tank, said he was impressed with this part of the budget plan.

“It’s a no-brainer for economists,” he said. “Why have taxpayers been [in effect] subsidizing home payments for the highest income people in the country?”

The overwhelming majority of low and middle income people take the standardized deduction when they file their taxes [and] they receive no benefit at all from the mortgage interest deduction, said Patrick Fleenor, chief economist for the Tax Foundation.

“If you live in an inexpensive home or you’re deep in your mortgage and paying little interest, you’re better off taking the standard deduction,” he said.

But homeowners in the highest marginal tax bracket, those earning more than $357,700 a year, get back 35 cents on their taxes for every dollar they spend on mortgage interest. Under the Obama plan, that benefit would be reduced by 20% to 28 cents on the dollar.

The mortgage interest deduction is still there, but it’s not as big. In a way, this kind of makes sense. You don’t want to completely abolish the mortgage interest tax deduction on the wealthiest, but at the same time, there is room for them to have not quite so big a deduction.

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