How capping the mortgage interest deduction may, or may not, affect you

Published: Friday, Feb. 1 2013 12:00 p.m. MST

Retired government employee Alton Bradford of Rockville, Md., stands in front of his refinanced home April 6, 2001. Bradford took advantage of lower interest rates, and estimates he's been able to reduce his monthly mortgage payments by several hundred dollars. Homeowners are able to take a tax deduction on mortgage interest, but discussions about capping the deduction amount are taking place.

REGGIE PEARMAN, AP

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For the average American, putting a cap on mortgage interest deductions may not warrant worry.

The idea — which was tossed around by Mitt Romney in his campaign — has won some support from President Obama. It’s unlikely that mortgage interest deductions would be completely eliminated, but rather a cap would restrict the amounts deducted from those in the highest tax bracket.

“I don't think an interest rate cap would affect the average taxpayer
 considerably,” said David Williams, CFO of Hydrocore, in an email to Deseret News. “In 2010, only 33 percent of taxpayers itemized. Only 26 percent of
 taxpayers claimed a mortgage interest deduction.”

In addition to not a large majority itemizing tax claims, Williams doesn’t think a cap would have much affect because the average taxpayer doesn’t receive much return from the mortgage deduction.

While it wouldn’t have much affect on the average American, there are pros and cons to both sides of capping the deduction.

In 2011, $72 billion were taken in mortgage interest deductions. But 40 percent of it went to households with adjusted gross incomes more than $200,000, according to a calculation from the Mercatus Center at George Mason University.

The study showed a major gap for those receiving deductions. Those in the $100,000 to $200,000 tax bracket had about $460 deduction in 2010. But those in the tax bracket above $200,000 received $1,784. The lowest bracket of $10,000 to $20,000 received $32.

What is the purpose of the cap? The actual effects of a high cap are hard to determine. For the average taxpayer, as pointed out by Williams, it won’t make much of a difference. But is this a punishment for the rich, or will it significantly benefit the economy to put the money back in the tax pool?

In their article from The Mercatus Center, Jeremy Horpedahl and Harrison Searles said it will actually help. Seventy-eight percent of households aren’t claiming the deduction, and those who are harmed will have that money raise tax revenue without raising taxes.

Niket Patankar, a senior vice president and head of the mortgage consulting at Sutherland Global Services, said the cap would help average taxpayers by making loan prices more competitive.

"Capping deductions would force/guide the high net worth borrowers to take on less mortgage debt for the jumbo loans,” Patankar said in an email to Deseret News. “Since there would be pressure on banks to make more conventional market loans, the pricing for these would be more competitive, resulting in lower costs to borrowers.”

Patankar explains there are two effects beyond just the tax return that the average American would have. That includes:


1. Availability of more capital for lending (more money available for loans).

2. A Reduction of effective interest rates (lower cost to borrow).

Having additional capital freed would allow lending to the average American family of about $250,000, Patankar said.

Horpedahl and Searles agree with Pataka — 78 percent of households aren’t claiming the deduction, and those who are harmed by it raise tax revenue without raising taxes.

For those previously considering home purchase, eliminating the deduction didn’t affect 65 percent of them, according to a study by the Texas Trust Credit Union.

But if the deduction didn’t exist, 8 percent said they wouldn’t be interested, while 27 percent were uncertain.

EMAIL: alovell@deseretnews.com

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