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Tax Day: To kill a mortgage interest deduction

Camp tax reform would limit what many see as critical tool

April 15, 2014

It’s tax day.

Well technically it’s the day most Americans file their income tax returns.

Tax freedom day will come next week – April 21st – the day the average American will have earned enough to pay their tax burden.

Well, not “average American” either – statistically about half of Americans don’t pay any income tax.

None. At all.

Meanwhile those earning $100,000 or more a year pay 71.6% of all individual federal income taxes paid. The top 1% of earners pay a tax rate of 33% on their $1.5 million in average earnings.

Tax freedom day is three days later this year, according to the Tax Foundation, and eight days later than in 2012. This is because pretty much everyone’s taxes – everyone who pays income taxes – went up thanks to the Affordable Care Act and the fiscal cliff deal signed earlier this year.

Obamacare increased taxes in 2013 adding a 3.8% tax on net investment income, and a 0.9% additional Medicare tax. The fiscal cliff deal was signed into law in January and raised taxes for 77% of the less than 50% who pay income taxes. The deal allowed payroll tax rates to increase.

(Fun Fact: Since taking office in 2009, President Barack Obama has formally proposed a total of 442 tax increases, according to Americans for Tax Reform. This doesn't include the roughly 20 tax increases in Obamacare.)

Into this mix is the comprehensive tax reform proposal by U.S. Rep. Dave Camp, R-Mich., called the Tax Reform Act of 2014.

What is its impact on income taxes – and especially the mortgage interest deduction?

The Camp proposed act would limit mortgage interest deductions and gradually step down the maximum amount. The current limit is $1.1. million on a principle and second residence, but the reform bill would limit that to $875,000 in 2015, $750,000 in 2016, $625,000 in 2017 and $500,000 in 2018 and beyond.

(Here is the full text of the Camp comprehensive reform, if you’re so inclined.)

Most every trade association with the word “Bankers” in their name is against this part of the Camp bill (and other parts), and you can hear the howls of Realtors across the nation like it's a blood moon at the very notion of anyone tinkering with the mortgage interest deduction.

But should the mortgage interest deduction be limited?

The effect on higher-end buyers (buying homes for $500,000 or more) may, as supporters argue, be minimal. Do people at that level really sweat the deduction?

Yet as fragile as the housing market is now (and for the past five years), any potential headwind is something those in the industry and lawmakers should be wary of.

 There also the question of fairness – income taxes are imposed on everyone who earns income. Why should people who earn more income be penalized by having a deduction limited?

Is the purpose of the tax code supposed to be a uniform way for all citizens to pitch in to raise revenues to fund the legitimate functions of government, or is it a tool for social agendas and redistribution?

The answer to that question may already be found in the fact that nearly half of Americans don’t pay income taxes.

What do you think?

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