(Original Post)
December 5, 2010
"Tough Choices:" A Change in the Mortgage Interest Deduction May Result in a Higher Mortgage Payment
The challenge is to cut the amount the U.S. treasury loses by subsidizing home ownership. (CBS)
(AP) With so much at stake, over the days and weeks ahead the CBS Evening News will be taking a closer look at the Tough Choices the country will be facing to reduce the debt and deficit. (Scroll down to vote your opinion on the issue)
Our latest CBS News poll on issues facing the country finds an overwhelming 73 percent of Americans saying the deficit problem is very serious.
With Washington's attention focusing on new steps to reduce the annual federal budget deficit and government debt, CBS News correspondent Bianca Solorzano reports one idea is to target the tax deduction for home mortgage interest. Currently, 75 million Americans are eligible to deduct the interest paid on their home mortgage from what they owe the government at tax time. Those who do save an average of $2,078 per year.
CBS Evening News Series: "Tough Choices"
The Challenge: To cut the amount the U.S. treasury loses by subsidizing home ownership. One way to do that is to reduce the mortgage interest tax deduction and replace it with a tax credit.
Ray Garcia and his wife, Yishane, are aware cutting the deduction could hurt their bottom line.
"We'd definitely be bummed to lose it, because it's a big chunk of money," says Yishane Lee.
The New Jersey couple's monthly mortgage payment is $3,455, with more than half going to interest. Now they are eligible for a $22,000 deduction. In their current tax bracket that yields $6,205.
The National Commission on Fiscal Responsibility and Reform proposes to change the mortgage interest deduction, which saves home owners a total of $80 billion every year in taxes.
The commission would replace the deduction with a 12 percent "mortgage interest credit" for all home owners. That's less than the average 17 percent credit homeowners currently claim and would increase federal revenue around $300 billion over 10 years.
For the Garcias the change would reduce the tax savings on their home by $3,500.
The Choice: Whether to modify the mortgage interest deduction at all. Some advocate eliminating it entirely.
"If you bought a house and you can afford to pay your mortgage because of the deductions the government just can't get rid of it," says director of Citizens for Tax Justice Bob McIntyre. "I mean that would put you in a pickle."
Which is why if the government did phase out the deduction, it would probably do so over 10 or 20 years.
"That would give housing prices time to correct, time to adjust for the new reality, and if you did that, you could bring marginal tax rates down," says tax policy director of Americans for Tax Reform Ryan Ellis.
The deficit commission also proposes limiting your mortgage interest deduction to one house and cutting the amount of mortgage eligible from $1 million to $500,000. That would raise another $41 billion dollars over 10 years.
Until Washington makes a tough choice it is life as usual for the Garcia family as they break in their new home. "To live your life according to what's going on in Washington is kind of crazy," says Yishane Lee.
"I make sure that I can pay my monthly mortgage regardless of the deduction," says Garcia.