When filing taxes, homeowners can deduct from their taxable income any mortgage interest paid (up to $1M) on a first or second home and the interest paid on up to $100,000 of home equity debt. Aside from building equity, the mortgage interest deduction (MID) is an attractive part of homeownership, and a tax deduction that is often contentiously mentioned in conjunction with tax reform.
So, what are the presidential nominees’ feelings toward keeping, reducing, or eliminating the MID? Further, why is the first thing on the chopping block when politicians talk about tax reform?
Why is it even a topic of discussion?
Let’s start with the latter – the idea that the MID is low-hanging fruit, and it is threatened anytime a politician believes they can use a machete on the budget instead of a surgical knife.
Congress’ Joint Committee on Taxation states that the MID represents $75 billion in cash that doesn’t flow into the Treasury. Coincidentally, that $75B would have canceled out almost all of the “sequester” budget cuts. Yet it remains critical to homeownership and appealing to first time buyers – and we’ve all seen what happens when our housing market crashes. Hence it remains.
Some object to the deduction, claiming that mostly middle- and upper-income households benefit and President Obama’s own National Commission on Fiscal and Responsibility Reform proposed the MID be converted into a 12 percent credit and capped at $500k of mortgage interest, and elimination of the deduction for equity and second homes (the proposal has gone nowhere).
Add a dash of political warfare
It became a topic of interest again during this political campaign season when 16 Republicans were vying for the presidential nomination, each offering creative tax reform measures.
Rand Paul didn’t want to touch the MID, Bobby Jindal wanted to cap it at $550k, Marco Rubio sought a $300k cap, Jeb Bush pushed for 2 percent of adjusted gross income, Rick Santorum proposed a 20 percent flat tax with no deductions besides the MID which would be capped at a $25k total write-off annually. Meanwhile, Ben Carson said he would not only cut the MID, but charitable giving deductions.
On the opposite end of the spectrum, Bernie Sanders had for decades proposed a $300k cap and limiting itemized deductions to a 28 percent maximum rate.
trump calls it “critical to the health of the economy”
Where do the remaining candidates stand?
Green Party nominee, Jill Stein wants to decrease the $1M home value cap on the MID, taking the position that not reducing the cap simply subsidizes Americans living in the most expensive homes.
Libertarian nominee, Gary Johnson intends to eliminate the MID, stating that bigger homes get bigger tax breaks, driving up prices for all homeowners. His campaign has called the MID a “distortion” of the housing market which “subsidizes” anyone with an “expensive” home.
Democratic nominee, Hillary Clinton would limit the deduction for the higher-income brackets, and while her final tax plan remains unclear, but at one point, she echoed Sanders’ 28 percent max rate idea.
Republican nominee, Donald Trump has put forth a tax plan that doesn’t touch the MID. “You know, a lot of people were worried about real estate,” he said at a rally in New Hampshire. “Try taking the mortgage interest deduction out, you’ll see what’s going to happen to real estate. You want to see a crash? Try that one.” Perhaps that’s why engaged Realtors favor Trump (he’s in real estate himself).