Why the Mortgage Interest Tax Deduction Isn't Untouchable
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What is the mortgage interest deduction and why has it been considered 'untouchable'?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen in New York. A popular tax break that has long been considered to be untouchable when it comes to tax reform is the mortgage interest deduction. And while that deduction might not be eliminated under the Republican tax plan, it could wind up being irrelevant. And The Wall Street Journal's Laura Cosisto is here for us to explain what that means. So, Laura, this is a very popular tax break. It allows homeowners to deduct from their federal taxes?
Yeah, so this was long considered a sacred cow just because of how many people it affects. In theory, anyone who owns a home can take this deduction, although in reality, not everyone owns a home that's worth enough. And that's really what's up for grabs right now is changes that could potentially mean that only people with very, very expensive homes would have any incentive to take it.
And so it's the size of the proposed standard deduction in the tax plan for individuals and couples that might make the mortgage interest deduction irrelevant for a lot of taxpayers. So it might make more sense for them to take that standard deduction?
How could doubling the standard deduction make the mortgage interest deduction irrelevant?
Yeah, this is what's so interesting about the way this is being handled. If Congress had come right out, if the Republicans had come right out and said, we're getting rid of the mortgage interest deduction, I mean, that would just be anathema. I And that means that it goes from basically, according to Zillow, being something that you would take if you have a home that's worth about $300,000 or more to being something that you would only take if you have a home that's worth something like more than $800,000. So it takes it from being something that a decent number of middle, upper middle class people would have an incentive to take to being something that only the very wealthy would take.
And there are some other tax deductions and some eliminations of deductions also in the mix in this tax plan. We're going to get to that in just a moment. We're speaking with The Wall Street Journal's Laura Casisto about the plight of deductions in the Republican tax plan.
Which taxpayers and home values would still benefit from the mortgage interest deduction under the plan?
And you're listening to Your Money Matters at The Wall Street Journal. Thanks for listening, everyone. So, Laura, for people who would be affected by this doubling of the standard deduction, which could eliminate the mortgage interest deduction, they're also dealing with the possibility of not being able to deduct their state and local taxes. And that's been well documented here on the podcast and in the Wall Street Journal. But that has triggered a big fight. And then that will add to the uncertainty about what we're talking about here.
Yeah, I was going to say, I think this is a much better understood aspect of the tax plan and therefore has generated a lot more controversy. But it plays into this as well. If you then, in addition to doubling the standard deduction, eliminate this deduction for state and local property taxes, you have even less incentive for people to itemize, even less incentive for them to take these deductions. And this, interestingly, affects a lot of the really high cost markets like New York and California. But there are also high property tax states like Texas that this could have an impact on. So this is going to be a big part of the fight as well.
And the lawmakers in those states have already said, we are ready for this and you're just not going to bulldoze over our residents.
Yes.
How would eliminating state and local tax deductions affect homeowners' decision to itemize?
I mean, I certainly cannot prognosticate what will happen in Washington, but I would be surprised if that deduction gets entirely eliminated just because of the controversy it's generated. Whereas, yeah, what's going on with the standard deduction is kind of neutral on its face, so you don't have that same outcry. As we say in the story, even the homebuilders and the mortgage bankers have actually said they might be okay with it, and that is a huge shift.
And there have been some studies that you point out in your story in The Wall Street Journal just about what the standard deduction doubling that could do.
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Chapters
7 chapters
1
What is the mortgage interest deduction and why has it been considered 'untouchable'?
0:02–1:12
2
How could doubling the standard deduction make the mortgage interest deduction irrelevant?
1:12–2:09
3
Which taxpayers and home values would still benefit from the mortgage interest deduction under the plan?
2:09–3:21
4
How would eliminating state and local tax deductions affect homeowners' decision to itemize?
3:21–4:34
5
Could changes to deductions in high-cost states like New York and California reshape the housing market?
4:34–5:36
6
What evidence suggests the mortgage interest deduction influences home prices and buyer behavior?
5:36–6:36
7
How might lawmakers and lobby groups respond as the tax reform debate unfolds on Capitol Hill?
6:36–7:15
Speakers
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