tax credit vs. mortgage interest deduction
There are two main tax codes introduced in the article, the mortgage interest deduction and the annual tax credit proposed by Bowles Simpson Commission. The former one allows home owners to lower tax bills by deducting interest on home mortgages from their taxable income, while the latter makes the mortgage interest a refundable tax credit. It has been a controversial topic whether the mortgage interest deduction should be replaced by tax credit, whereas it seems the drawbacks of tax deduction have outweighed its benefits nowadays and the Bowles Simpson reform might turn out to be a better option.
Lobbyists for homebuilders and realtors defend the mortgage interest deduction by the perspective that the tax break has promoted the homeownership rate, which is not true. On the contrary, it discourages homeownership among low/middle income families due to the raise in housing price and provides incentives for high income individuals borrow more debts and purchase more pricy houses. People bettered-off from the deduction are those who are already well-off, while the lower- or middle-class almost remain in the same situation as without the deduction, some of the lower-income don’t even claim the deduction since the benefit is little.
The value of the mortgage interest deduction to taxpayers depends on the price of the houses purchased. Assuming for the houses sold at $1,000,000 and $200,000, the mortgages are $800,000 and $160,000 respectively, and the mortgage interest are both 5 percent. The deduction for the homeowner looking at the pricy house is $40,000, whereas it’s only $8,000 for the homeowner purchasing the lower priced one. The income tax brackets of the taxpayers contribute to the benefit as well. “The higher your tax bracket, the more home mortgage interest deduction reduces your overall tax bill.” Therefore, tax reduction benefits only a small number of wealthy people, and they would bear the brunt most once it’s repealed.
Tax credits, on the
Lobbyists for homebuilders and realtors defend the mortgage interest deduction by the perspective that the tax break has promoted the homeownership rate, which is not true. On the contrary, it discourages homeownership among low/middle income families due to the raise in housing price and provides incentives for high income individuals borrow more debts and purchase more pricy houses. People bettered-off from the deduction are those who are already well-off, while the lower- or middle-class almost remain in the same situation as without the deduction, some of the lower-income don’t even claim the deduction since the benefit is little.
The value of the mortgage interest deduction to taxpayers depends on the price of the houses purchased. Assuming for the houses sold at $1,000,000 and $200,000, the mortgages are $800,000 and $160,000 respectively, and the mortgage interest are both 5 percent. The deduction for the homeowner looking at the pricy house is $40,000, whereas it’s only $8,000 for the homeowner purchasing the lower priced one. The income tax brackets of the taxpayers contribute to the benefit as well. “The higher your tax bracket, the more home mortgage interest deduction reduces your overall tax bill.” Therefore, tax reduction benefits only a small number of wealthy people, and they would bear the brunt most once it’s repealed.
Tax credits, on the