Surely you’ve noticed headlines about the potential for losing the mortgage interest deduction. Let’s take a look at the history, what the taxes intent was, and how it has affected American since its inception. In 1894, the first “modern” income tax was created and then ruled unconstitutional. Then in 1913, the constitution was amended and a new tax law was created that allowed for the deduction of interest. At the time, that law was not targeted at the middle class. People had a difficult time separating business and personal expenses, so it was easier to allow deductions of interest. After WWII, interest deduction was promoted as a way to make owning a home more affordable to the middle class and it worked. Today, homeowners count on this deduction when considering how much of a home they can afford. Most of the interest tax deductions were eliminated by the Tax Reform Act of 1986, but, the mortgage interest deduction was kept in hopes to encourage home ownership.
Since mortgage interest deduction lowers the amount of taxes a homeowner pays, owning a home is more affordable. Homeowners are allowed mortgage interest deduction up to the first million of debt owed on a principal residence, under current laws. This includes funds used to acquire, construct, or substantially improve the residence. To qualify for the deduction, homeowners need to itemize deduction on their tax return. Wealthier homeowners appear to benefit the most, because they have larger balances on their mortgages and their total itemized deductions exceed standard deductions thereby saving them more on taxes.
The National Association of Realtors strongly supports the need to keep this deduction. The association believes it is “vital to the stability of the American housing market and economy.” Others believe housing prices would decrease between 3 to 15 percent without this deduction and with lower housing prices less taxes would be paid. However, if housing prices decrease, then home values will also decrease causing homeowner’s who are already upside down in their homes to lose even more value.
Even though the National Association of Realtors supports the deduction and IRS statistics reflect that only 25 percent of homeowners benefit from the mortgage interest deduction, having the deduction available seems to be the best option the economy. Whether the mortgage interest deduction is helpful to you depends on your individual situation. If you itemize your deductions, then this deduction may be beneficial to you. If you don’t itemize your deductions, you still benefit from increasing the equity in your home.
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