Cut the Mortgage Deduction? Not So Fast!

The Obama administration's budget threatens to cut a benefit many Americans view as practically a right -- the mortgage interest tax deduction -- and powerful real estate interests are fighting back.

The move would affect only households earning $250,000 or more, but opponents say it could prolong the housing crisis by slowing already torpid home sales and deal another blow to home values ravaged by the market crash.

Under the budget plan, households now subject to 33% and 35% rates would be able to claim deductions only at a 28% rate. So for every $1,000 in deductions, a top-bracket household would save $280 in taxes, down from $350.

If approved by Congress, the new rules would go into effect in 2011.

A Realtors association analysis of Internal Revenue Service data found high-income taxpayers who claim the mortgage interest deduction comprise about 2% of tax filers. But a disproportionate number – about one sixth – are in California.

The half-million Californians who would be affected by the Obama tax change are by far the largest total of any state. [Source]

The Obama Administration’s plan to increase revenue by taxing top earners takes shape in this proposed reduction in the mortgage interest deductions for the “top 2%”.

Although this amounts to a reduction and not an elimination of the tax break, the proposed measure comes at a time when the upper brackets are feeling the pinch of reduced wages, higher health care costs and plummeting net worth. Not surprisingly, it's being received like a bucket of cold water.

Until now, the mortgage interest tax deduction – the pillar in the cult of homeownership in America – had been untouchable. However, someone has to pay for the wealth destroyed in the recent housing and banking debacles. Legislators have determined these funds will come from the only ones who have money left in their pockets, those at the top of the economic ladder.