Here’s a story about the changes being discussed to the mortgage interest deduction.  The $41 billion in savings over 10 years sounds trival – but could it have unintended consequences?

Would you change your plans about buying a house if the MID was lowered?

http://www.latimes.com/classified/realestate/news/la-fi-harney30-2009aug30,0,4745.story

Tops on the CBO’s hit list for housing: Slash deductions for homeowner mortgage interest from the present $1.1-million limit to $500,000, phased in with $100,000 annual reductions starting in 2013.

Taxpayers now can write off mortgage interest on their principal home debt up to $1 million and on home equity debt up to $100,000. Under the CBO’s option, that maximum mortgage debt amount would shrink yearly until it hit $500,000. Over a 10-year period, this change would boost tax collections by an estimated $41 billion.

The CBO offered up a second option if Congress wants to raise a lot more money: Replace the mortgage interest deduction with a flat 15% tax credit for everybody with mortgage amounts below the declining limits in the first option. Rather than taking write-offs tied to income tax bracket, every homeowner would get a credit worth 15% of mortgage interest paid.

Who would benefit? Primarily lower- and moderate-income taxpayers who don’t itemize on their returns. Who would pay more? People with big mortgages and higher-than-average incomes, who are more likely to itemize under current rules.

“People with big mortgages” sounds like they are putting more of the burden on the higher-cost areas like California.  Once they get started, what’s next?

Other items on the CBO’s revenue-raising target list:

Get rid of all write-offs for state and local taxes, including property taxes. That would pump $343 billion into federal coffers from 2010 to 2014, and $862 billion by 2019.

Clamp a 15% cap on the value of all itemized deductions — not just mortgage interest and property taxes but also charitable contributions, medical expenses and casualty losses. The revenue windfall: $1.3 trillion over 10 years.

Revert to the capital gains approach that prevailed before 1987. Rather than taxing most gains at 15% as the current code does, the CBO plan would exclude 45% of gains from taxation and tax the remaining 55% at an individual’s regular tax rate. New money raised: $48 billion over the next decade.

 

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