Home Morgtgage Deduction in Danger  

President Obama's budget takes on the mortgage-interest tax deduction for top earners, and some say this proposal couldn't come at a worse time for the housing market.

Many in the housing industry believe this credit could do a lot to jump-start the bleak housing market.

The mortgage-interest deduction for owner-occupied homes is estimated to cost the government $100 billion this year, making it the largest government subsidy for housing and one of the most expensive tax deductions.

Many economists have long argued that the deduction doesn't actually have a significant impact on home ownership, and instead mainly subsidizes the cost of buying a home for the richest Americans, who would buy homes even without it. Some have blamed the mortgage-interest deduction, in part, for spurring borrowers to take out larger mortgages in order to maximize their subsidy.

Most lower and middle-income homeowners don't qualify for the deductions because they don't itemize deductions on their tax returns. During the presidential campaign, Mr. Obama proposed a 10% mortgage-interest tax credit for homeowners who don't itemize.

The proposal, which would also curb deductions on charitable giving, could face an uphill battle in Congress and among powerful lobbies. The real-estate industry strongly opposed a 2005 proposal from a White House tax-overhaul panel to convert the deduction to a 15% tax credit. That proposal also called for lowering the $1 million mortgage ceiling on the deduction to the size of an average mortgage for each housing market.

Some of President Obama's top economic advisers have called for a refundable tax credit that would replace the current mortgage-interest deduction. If Mr. Obama's budget proposal were to pass, tax experts say that could establish a beachhead for a more expansive overhaul later.

In 2007, households with adjusted gross incomes of at least $200,000 accounted for 30% of all mortgage-interest deductions, by dollar value.

Stimulus Bill Gets Mixed Reviews

Real estate experts gave it decidedly mixed reviews, but the stimulus bill that President Obama signed into law contains a number of incentives that could spur single-family home and condominium sales across the nation.

The legislation provides an $8,000 tax credit to first-time buyers who purchase a home between Jan. 1 and Dec. 1 of this year. The credit is refundable, meaning that the federal government will issue a check for the difference to homebuyers whose tax liability for the year is less than $8,000.

The home buyer tax credit has its limits, of course. Single buyers earning up to $75,000 and married buyers earning up to $150,000 can take the full credit, which phases out as incomes inch higher. Single buyers cannot take any credit at all if they make more than $95,000. The same applies to married couples earning more than $170,000.

Some real estate experts say the credit improves upon an incentive passed last year to entice first-time buyers into the market. Congress last year allowed those buyers to take a $7,500 credit on their tax returns, but the credit had to be repaid to the federal government in future years. It essentially amounted to an interest-free loan.

The stimulus bill, approved by Congress and signed by the President, eliminates the provision that the tax credit must be paid back,

The bill also includes a provision designed to ease low- and moderate-income buyers into the market. The legislation allows buyers who purchase a home with the help of mortgage revenue bonds from their state housing finance agency to take advantage of the first-time buyer credit. Last year's stimulus bill did not allow such buyers to avail themselves of both incentives.

Some economists are skeptical about the true benefits of the bill, suggesting that government is just trying to pigeonhole people into buying a home by giving them a tax benefit when they really shouldn't be homeowners in the first place, which is partially why we're in the mess we're in now.

The tax credit does not help people come up with the cash to buy a home. You can go ahead and file your returns on April 15, 2010, and the government will give you the $8,000 back. It is like a rebate after you buy. How does that help get you into a home tomorrow?

Tax Changes That Could Help This Time

As tax time fast approaches once more, there are some new tax laws on the books that could actually HELP this time around. The economy actually dictates how much tax provision is needed each year, and the poor economy we're all suffereing through could mean good news for taxpayers, for a change.

Here is a quick rundown on some of the changes you should be aware of before you sit down and start on the grueling task of preparing your taxes for 2008.

Higher personal exemptions. The value of each personal and dependency exemption went up to $3,500 for 2008— up $100 from 2007.

Standard deduction increase. The standard deduction for married couples filing a joint return is up to $10,900. For singles and married individuals filing separately, the deduction is now $5,450. (For heads of household, it's $8,000.)

Bigger health care deductions. If you have a health savings account (HSA), the maximum HSA deduction increases to $3,000 for singles or $5,950 for family coverage. And those ages 55 or older can add $1,000 on top of that.

PMI deduction. For years, homeowners who bought a home with less than a 20% down payment had to not only purchase private mortgage insurance (PMI) to protect the lender against default — they also had zero tax benefits for those payments (which could add up to hundreds, and even thousands, of dollars over the course of just a few years)!

Starting with any new mortgages from January 1, 2007, you can deduct this PMI expense along with your usual mortgage interest from your income tax. Recently, legislation was passed so this will apply for any new mortgages through 2010. However, your family income needs to be less than $100,000 per year — if it's higher, your mortgage insurance won't be 100% tax deductible.

For each $1,000 of annual household income earned in a year, the deduction is reduced by 10%. Once a family's income is over $109,000, the PMI deduction will not apply.

Higher income limits for deductible IRAs and Roth IRAs. You can now take a full IRA deduction if you're covered by a retirement plan at work if your modified adjusted gross income is less than $85,000 (married, filing jointly) or $53,000 (single or head of household). You can also take a partial deduction up to $105,000 for married filing jointly or $63,000 for singles and heads of households.

Increased contribution limit for 401(k) plans. You can now contribute $16,500 to your 401(k) in 2009 and other similar workplace retirement plans. This is up from $15,500. By the way, if you're 50 or older, the limit rises to $22,000 — a $1,500 increase.

Tax relief due to foreclosures. There has been no shortages of foreclosures in recent years, and it looks like we'll be seeing the same kind of troubles in 2009.

The positive news (if you can call it that) applies to any foreclosures in 2007, 2008 and 2009. That is, any forgiven debt during those years in connection with a foreclosure, short sale or loan restructuring will not be treated as income, as it has in years past.

The tax basis of the home is reduced by the amount of canceled debt excluded from income.

There are some restrictions, so check with your CPA or tax advisor on these.

Increased Section 179 expense deduction. If you own your own business that requires you to purchase heavy equipment, this deduction allows you to elect to deduct all or part of the cost of certain qualifying property in the year you place it in service.

And thanks to a new law, the maximum amount of equipment that businesses can expand increased to $250,000 in 2008 — a whopping $125,000 increase from 2007.