Mortgage Interest Deduction – At Risk?

Written by Anita Bates
August 25, 2011 3:07 pm

In our Spring issue (Vol. 2 – 2011) we commented on how important the Mortgage Interest Deduction (MID) is to American families.  According to the National Association of Realtors, 91% of homeowners who claim the deduction make less than $200,000 per year, making this tax break one of the most significant benefits of home ownership.

Unfortunately, the current national economic climate may put this valuable tool at risk. 

The Budget Control Act of 2011 (Debt Ceiling Agreement) signed into law on August 2, 2011, provides for creation of a “Super Committee” comprised of 6 members of the Senate and 6 members of the House of Representatives, with each of the political parties represented equally.  This “Super Committee” is charged with identifying $1.5 Trillion in deficit reductions to be achieved within the next 10 years.  The target can be achieved either through revenue increases or actual spending cuts   These must be identified no later than December, 2011, in order to avoid automatic across the board spending cuts that are penalties for failure to meet the time lines specified in the Act.

Even though, as passed, the Budget Control Act of 2011 has no direct impact on real estate tax rules or spending provisions, the rules concerning mortgage interest deduction may be at risk for substantial change as the “Super Committee” looks for ways to increase income.  Estimates say that the “cost” of the MID is from $25 to $80 billion per year in lost tax revenues, making the elimination or modification of the MID a very tempting target.

While curbing or eliminating the mortgage tax break has been talked about for years, it is now on the table as never before, so don’t be surprised if the MID is included in the recommendations for budget cuts and revenue increases that will be unveiled in the coming months.

Have You Started?

Written by Anita Bates
April 9, 2011 2:08 pm

Many of you have already filed your taxes for 2010.   Those of you who have not are likely in the midst of trying to compile your information to put in Turbo Tax or send to your accountant.

Wherever you are in the process, it’s good to remember and appreciate the value of owning a home and the tax benefits that result from home ownership.

According to the National Association of Realtors, the 75 million people who own homes in America pay 80% – 90% of the total income taxes in the U.S.

These homeowners receive a direct financial benefit from owning a home at tax time.  The obvious benefits are the ability to deduct real estate taxes and mortgage loan interest which can create a sizable tax savings.

 There is continuing debate in Congress about the viability of the Mortgage Interest Deduction and whether it should be reduced or eliminated.  But for millions of middle income Americans, this can provide substantial relief from the tax squeeze they feel each April.

“Recent proposals to reduce or eliminate the mortgage interest deduction and remove government support of the housing finance market could have disastrous consequences for the economy, not to mention making it harder or nearly impossible for millions of families to own their own homes. We believe America must continue to invest in homeownership, for the future of our families and our nation.” (Ron Phipps, President, National Association of Realtors)

According to the National Association of Realtors, 91% of homeowners who claim the mortgage interest deduction earn less than $200,000 a year.   The ability to deduct the interest paid on a mortgage can mean significant savings at tax time. As an example of how the deductibility of mortgage interest can benefit a household, consider a family who bought a home in 2010 with a $200,000, 30-year, fixed-rate mortgage.   Assuming an interest rate of 4.5%, they could save nearly $3,500 in federal taxes when they file this year. 

Another benefit of home ownership is a change in the capital gains rules on home sales a number of years ago which makes it possible for sellers to keep more of the profit they receive from the sale of their home.   For many families, buying and selling a home is the most effective way to begin building wealth.

Added to these benefits are credits for certain energy-efficient home improvements.  These credits can vary from year to year so be sure to check to see if your energy improvements qualify.

 As always, each individual’s circumstances are different so it is advisable to consult with a tax professional to make sure you are taking advantage of all the deductions you might be entitled to.

White Water Navigation…

Written by Anita Bates
January 13, 2011 12:14 pm

It may be too soon for some, but January is the time many of us start thinking about our annual adventure with the IRS.   Just like navigating rapids in a raft, it can be a challenge to know what records we need to keep and what we can toss.  The things you should keep longer than the three year rule of thumb are:

 Actual tax returns – keep forever.  You can, however through away the supporting documents after 3 years.

 Records pertaining to your house or other real estate – as long as you live in it or own it.  Documents that show what you paid for it and what you spent on improvements or upgrades will come in handy when you sell if you need to worry about a tax bill because you made too much money on the sale.

 Records showing the initial purchase price of stocks and mutual funds – keep until you sell so you can establish their basis.  Once sold, keep the records for 3 or 6 years depending on the IRS rules.

 Items to keep for 3 years include:  thank-you  letters from charities, year end investment & bank statements.

Records showing how much went in and out of IRA and 401(k) accounts so you don’t overpay taxes for withdrawing the money.  Keep any 8606 forms used to report nondeductible contributions t traditional IRA’s.

You can toss:  ATM receipts, bank deposit & withdrawal slips, credit card receipts, pay stubs, paper copies of most monthly bills, unless you need them for tax purposes. 

To guard against identity theft, dispose of your records properly by investing in a good cross-cut or confetti type shredder.  Anything that might contain information of a personal or financial nature should be shredded before being thrown away. 

If you have too much to get rid of (because you’ve kept everything for years and years!) consider using a shredding service.  Most communities have commercial shredding companies.  In Anchorage, ShredAlaska (907-929-1154) will dispose of 100# of paper documents (approximately 4 standard storage boxes) for $20.

(information in this article from www.kiplinger .com/magazine/archives)

Potential Tax Change:

Written by Anita Bates
July 19, 2010 2:31 pm

The National Association of Realtors issued a call to action on May 16, 2010 bringing attention to a proposed tax change that will impact real estate.

Congress proposes that ANYONE who receives rental income will be required to file IRS Form 1099 reports if they make payments to any contractor (such as plumbers, HVAC repairmen, lawn services and the like) if they pay the contractor $600 or more in any particular year. The proposal would apply even to those who own just one property.  Many landlords only own one property and use their real estate investments to supplement their income.  Requiring them to file a Form 1099 could force them to go to the extra expense of hiring a tax professional and subject them to additional risk of penalties for not filing.