Most people dont do their own taxes. Because of this they believe the NARL hype that the MID is saving them a bunch of money.

There are some middle income people who benefit from it, but most who do are in way over their heads financially and have way more debt than is prudent.

I personally would be happy if they doubled the standard deduction, and eliminated all or most itemization. It would be a great leap foward towards a flat tax.

The Trump administration has proposed this, but one of the hurdles is getting it past states with high tax rates. It would really hurt revenue collection in high tax states like California and Illinois as their weathy citizens benefit the most from the deductability of not only mortgage interest, but also state income taxes against their federal income tax.

This is a Baptist and bootleggers coallition problem. Not only do the wealthy benefit from a complicated tax code, and realtors benefit, but so do the tax lawers, income tax preparation services, and all people involved in revenue collection at the federal state and local level.

Hard to take on that many special interests who will fight you every step of the way.
No one likes having their cheese moved.

Isab is correct that most people buy far too much house. There is no reason to go for a McMansion, but housing has become a stupid status symbol. There's nothing wrong with the kinds of houses I grew up in: single-level, 2000 square feet or so is plenty for a small family. But almost no one in my generation buys them anymore.

Should mortgages be deductible? This is a societal decision that was made to encourage people to buy houses. The motivation seems to have been to encourage them to take responsibility (you have to maintain your house), to develop a stable life style (you can't be evicted, nor can you just pick up and move on).

Whether or not those goals are sensible? Today? That's the discussion that needs to happen.

Imagine a whole nation of propertyless people.

What awesome cannon fodder they would make. Then, the country's conversion from a republic to a pure democracy or oligarchy could be accelerated, maybe completed.

As even small children would learn, everything would be "somebody else's problem". Renters, by definition, don't own. It's the landlord's responsibility. What a relief! SO much less responsibility! Ahh, the good life! In some states, I can't even be evicted in less than 90 days no matter what I do to the property, and I'm protected from the market forces trying to increase my rent by lawmakers eager for my vote!

BTW, nobody makes you rent. You're choosing your location, near Venice Beach, in the bankrupt Earthquake State because of the perceived value of being there. You could even stay in California and buy for less than you're paying rent, but you do not value ownership - even if you don't get a deduction.

That's all.

By the way, I'm curious about this "subsidy" assertion. Does this mean that if I am untaxed for something, I'm automatically a freeloader? Do tell!

Since 1945, the G.I. Bill has encouraged veterans to obtain a college degree. The MID has encouraged home ownership. Both are very worthy and popular goals as they have enabled hundreds of thousands to get a slice of the American dream.

Canada does not allow a mortgage interest deduction and it has a higher percentage of home ownership than the US.

As a homeowner who barely benefited from the MID, and wouldn't have at all if not for New York's heavy tax burden, I agree with Isab. Double the standard deduction, and be done with it.

"Why not level the playing field and allow renters to deduct their rent?"

Because that would be a double subsidy. Renters already get that
deduction indirectly. Without the landlord's interest deduction, the
apartment rent would have to be higher than it now is.

I think that "narcissistic 3-year-old brat in the White House" is right to try and simplify the tax code. Reducing individual deductions will go a long way toward that goal. However, absent the MID, the government should take other steps to encourage homeownership.

What does society get from homeownership? Stability. Society benefits from homeownership. Renters are, by nature, transient. They can pack up and leave as they've committed no money beyond rent to the property and are leaving nothing no money on the table if they simply leave.

Owners are committed to the places in which they live. They are concerned about property values and the things that affect property values. Renters are merely involved.

The difference between committed and involved is the proverbial ham and egg breakfast: the chicken was involved, the pig was committed.

Our ancestors did not make their way west by wagon, horse, and foot to rent apartments in California, Oregon, Oklahoma, Kansas, Colorado, et al. They went west to own land.

Owners improve the property and increase the value of the property, increasing the overall wealth of the area. Renters don't. My wife and I owned a house in the Bay Area until last year. We made improvements to the property, increasing the value of the house by over $100,000, that was over and above the inflationary increase inherent in the market. We rent a house back East right now (death in the family), and are not making improvements to the rental beyond not trashing it. We didn't put a $25,000 kitchen remodel in the rental, nor did we put a $14,000 patio in it. Nor any of the other things we did to our Bay Area house. If the rental house needs X and Y, we'll do Y, but we're not doing X in a house we don't own and from which we'll get no value returned.

Canada does not allow a mortgage interest deduction and it has a higher percentage of home ownership than the US. ~ David Thomson at May 11, 2017 5:21 AM

The Canadian government takes other taxpayer financed steps to encourage homeownership. The CMHC provides mortgage insurance and allows people to purchase a house with very little down.

Canada also taxes investments in housing less than other investments.

The government taking less of my money is not me being subsidized, as no doubt others have pointed out. Nobody is paying me or giving me anything. Im sure you take your deduction for your sales taxes, are we subsidizing you?

Dont get me wrong, im for a no-deductions flat tax (capped by constitutional ammendment so it cant be raised) or, even better, a likewise-capped national sales tax. Our current system is absurd.

The government's taking less of SOME people's money is what's wrong here.

Amy, did you not read the part about landlords' mortgage interest deductions?

I dont know what its like on the overcrowded, high priced coasts where lots of people rent, but herme in flyover country i can drive through any given neighborhood and pick out the rental houses with 90% accuracy. The neighborhoods that are mostly rentals are nowhere most people would want to live.

The entire concept of our current tax code is taking varying amounts of money from people. If you spend more than 10% of your income on medical bills you get to deduct that while I and my 9% "subsidize" you. Take on the whole tax system, not one deduction.

Consider how much your rent would be if your landlord DIDN'T have the following deductions:

1. Loan Interest/Points

2. Depreciation of Assets

3. Taxes

4. Repairs

5. Maintenance

6. Insurance Premiums

7. Utilities

8. Travel Expenses

9. Vehicles

10. Management Fees

11. Legal and Professional Fees

12. Office/Operating Expenses

13. Advertising

14. Commissions

15. Start Up Expenses

https://www.landlordology.com/tax-deductions-for-landlords/

Because landlords can deduct interest on loans and leverage rental ownership, low income renters get a market benefit from high tax rate landlords when they rent as it drives the cost of the the rental down. A mortgage deduction in not useful unless there is enough income to itemize deductions

Some people think a "tax deduction" is a dollar for dollar reduction in total tax burden. They are as ignorant as they are dangerous to public policy. A $10,000 mortgage interest deduction is NOT a $10,000 reduction in tax burden. It's a reduction in the GROSS INCOME that taxes are calculated from. So if you are in the 15% tax bracket you can deduct 15% of that $10,000, which is $1500.

I'm all for ending the MID. It is mainly a subsidy for realtors and banks. But
"So, either fork over to renters or stop forking over to people who buy homes." is plain wrong. If the MID is removed then rents are going up. That deduction is priced into your rent already. Remove it and property owners will react.

As for the MID itself, it has a highly regressive effect, and I don't believe it does much to increase home ownership. Everything I've read on the deduction points to it causing people to buy slightly larger houses and paying significantly more for that increase. I also feel it encourages bad behavior by encouraging people to borrow more. Loans are necessary for the vast majority of us to do certain things. But on the whole they are not a good thing. And the argument about how much money you save is a pile of bunk. It is the same as people who buy things on sale that they didn't need and exclaim about how much they saved.

"There's nothing wrong with the kinds of houses I grew up in: single-level, 2000 square feet or so is plenty for a small family. But almost no one in my generation buys them anymore."

I beg to differ with you on some of the details Random. But you are right that over the last 40 years the average home has increase by 1000 sq ft. A ~60% increase. The price per median square foot has stayed the same in inflation adjusted dollars. I couldn't find any quick data but I believe the increase in inflation adjusted price matches economic growth. So even back then people bought more than they needed. After all it is just part of the human condition.

"The government's taking less of SOME people's money is what's wrong here."

Then you've got bigger problems than the MID. Have you looked at the tax code? The first dollar you make is taxed differently than the 10,000th dollar and it's even more for your 40,000th. People with kids get a deduction for that. Solar panels on your roof, there's another deduction. I could go on and on. After all the tax code is ~75k pages long.

I do my own taxes. I do one version where I deduct the MID, and one where I don't.

It turns out they're the same because the standard deduction is greater than the itemized deductions, so I end up ignoring the MID.

Further, I'm paying off my mortgage as fast as possible, since that will save much more money in the long run. Am I freeloading from that, since that means less revenue for the bank, and thus less taxes paid by them?

Remember: it's not the government's money.

Okay, first things first: "That same year, the federal government dedicated nearly $134 billion to homeowner subsidies. " This is in line with the NYT's apparent attitude that all assets and income rightly belong to the government, and anything the government allows you to keep amounts to a subsidy. I call bullshit. There is a huge difference between being allowed to keep some of the income you worked for, and being given money from the public treasury that you didn't earn. The author conveniently neglects to mention the billions of taxpayer money that goes directly into subsidized housing. The Department of Housing and Urban Development, an agency that exists to subsidize housing, was allocated $49.7B in FY16 (source), and a number of other federal agencies provide money that goes to subside housing and housekeeping, plus unfunded mandates that are imposed on states and cities.

Second, if it's true that the working class and lower middle class are mostly renters, that's recent phenomenon, driven largely by ultra-high costs of living in urban centers. A big part of government policy in the post-WWII era has been to get the working and lower middle classes into home ownership, and until recently, it was quite successful. A big part of American morals has always been property ownership for the masses, because historically, those who hold property hold power, and will usually shepherd their investments wisely. Heck, that was the pretense for the whole sub-prime loan crisis -- getting the lower classes into home ownership.

Amy's made her choice to rent, and I won't criticize. It's a free country and people can do what they want. But it stands to reason that people who own will take more care of their properties. As M4 said, you can drive though the suburbs of any mid-size American cities and tell right away which neighborhoods are mostly rentals. It's the big urban areas that are the outliers here. And that's happening because they take measures that are semi-intentionally meant to make housing expensive. That $625K? That's a lower-middle class house in L.A. I don't know if it will even buy you a closet in Manhattan. I get a laugh out of people who propose capping the MID, because most of them are big-city types who don't realize that they're shooting themselves in the foot. All that will do in the big cities is make it even harder for people to move up economically. Out here in flyover country, only the most expensive houses cost that much. We're fat, dumb and happy -- and prosperous.

One other thing: There is another method by which renting is "subsidized" by tax policy (if you book with that NYT philosophy). It's the fact that if you sell a rental property, and you take a loss on it, you can deduct the loss. You can't do that with a personal residence. I've recommended this strategy to several people who found themselves trapped in houses losing value: move out and rent it for a year. Then it's a rental property and you can deduct the loss.

Finally, I do support the idea of an overall simplification of the tax code eliminating the MID. A measure that just eliminates it without any other consideration will not do. Politically, anything that makes taxes go up on the middle class isn't going to fly politically, even if there would be indirect long-term benefits, like products costing less due to lower corporate taxes. And never let anyone convince you that a proposed tax is only going to hit the "elites". They always lie. When the Alternative Minimum Tax was passed, were were assured that it absolutely, positively would never impact anyone outside of the 1%. Guess what? Two-earner middle class couples in high-cost-of-living areas are now paying it, and it's working its way down the income range as inflation does its dirty work.

When talking about public policy, the real answer to any question beginning with "We Do We ...?" is either a) it is popular with lobbyists and those who give money to politicians, or b) it is popular with voters and those who give attention to politicians (e.g., Mass Media). Everything else is just rationalization.

Regardless of the effect of the MID on the level of home ownership, the thing that really ticks me off about the MID (as a renter) is that, through the magic of second mortgages, interest on any loan can be deductible. Need to borrow money for junior's college education? Extend your mortgage and the interest is deductible. If you are a renter you don't have that option: you pay interest and don't see any return on that. Need to buy a new car or boat or take a vacation to Aruba? Pay for it with a second mortgage and the interest is deductible. If the MID can be justified at all, at the very least its utility should be limited to home purchases.

Remember: it's not the government's money. ~ I R A Darth Aggie at May 11, 2017 7:07 AM

Let's also keep in mind that with any deduction, the government has already had that money for several months and has earned considerable interest off of it during that time.

Need to borrow money for junior's college education? Extend your mortgage and the interest is deductible. If you are a renter you don't have that option: you pay interest and don't see any return on that. Need to buy a new car or boat or take a vacation to Aruba? Pay for it with a second mortgage and the interest is deductible. If the MID can be justified at all, at the very least its utility should be limited to home purchases. ~ Ron Knight at May 11, 2017 7:32 AM

Again, society benefits from the additional money you are putting into the economy.

As a renter, you don't have the collateral to secure such loans. Is that the government's fault?

Regardless of the effect of the MID on the level of home ownership, the thing that really ticks me off about the MID (as a renter) is that, through the magic of second mortgages, interest on any loan can be deductible. Need to borrow money for junior's college education? Extend your mortgage and the interest is deductible. If you are a renter you don't have that option: you pay interest and don't see any return on that. Need to buy a new car or boat or take a vacation to Aruba? Pay for it with a second mortgage and the interest is deductible. If the MID can be justified at all, at the very least its utility should be limited to home purchases.

Ron Knight at May 11, 2017 7:32 AM

I know you have a lot of righteous resentment over this, but let me assure you, the origination costs of these loans, and the interest paid on them don't even come close to the alternative of not taking the loan to begin with. A deduction is only good if you have a lot of income to write it off against, and are tettering on the edge of creeping into a higher tax bracket.

These sucker home equity loans are for the math impaired.

However there is one situation where borrowing money can be better than paying cash. That is when you are in a high inflation cycle. It is always better to borrow money that is losing value rather than cashing out assets that are making money in that situation as long as the cost of borrowing is low.

i can drive through any given neighborhood and pick out the rental houses with 90% accuracy.

I just completed the house-hunt process in ATX, and, while the houses currently occupied by renters were consistently bad, we saw some real doozies where the owners themselves had absolutely trashed their own homes. Because "I ain't got no landlord to tell me I can't turn my backyard into a landfill with 'found materials' for my art and build a bar into the livingroom wall, and paint murals on the floor, and own three huge dogs."

There's nothing wrong with the kinds of houses I grew up in: single-level, 2000 square feet or so is plenty for a small family. But almost no one in my generation buys them anymore.

We actually saw TONS of competition over the little 1,500 square-footers when we were house-hunting. Because going small lets you stay near the city, which is hugely important to lots of folks here (us included, as my husband works in the bar/restaurant industry). The 5 BR, 3 bath 30 minutes out of town? On the market for a month. The 1,100 square-footer close in? Multiple offers the first morning on the market. Having a little house in a "cool" location is actually a status symbol here. Although it's a foreign concept in other places -- my in-laws (near Dallas) thought we were joking when we said we'd bought a 1,600 square-foot "cottage" (their actual description).

I've been awaiting this change for years. It doesn't make sense to accept a progressive tax system, with all its inherent brakes on the economy, if it's going to have huge holes in it like this one. Let those rich enough to own homes pay their own costs.

I agree. Trump should nix that deduction in exchange for even larger tax cuts. And yes, I do have a mortgage.

Homeowners are nicer than other people. There's a compelling humility within the heart of those who are paying, or have paid, a mortgage... An incisive attention to detail in matters of finance (a concern for the growth of neighbor's children when the butcher raises his prices), and fastidiousness about the deportment of oneself and one's fellows on the street: I have more of my life riding on this than you do, you monthly little shitpunk.

Team Exemption!

> Canada does not allow a mortgage
> interest deduction and it has
> a higher percentage of home
> ownership than the US

Who says "percentage of home ownership" is the goal here?

Exactly who's encouraged to own a home is a big part of this.

Besides, Canadians. Blechy-poodle gross.

There's a principle here that's almost never stated:

Every measure to "make things tougher for the rich" - limit wealth - makes it harder for everyone.

Money represents effort. That's what it measures. You can get there with muscle, brains or a combination thereof, but when you make anything harder, fewer people can do it.

Fewer people just like you.

Ms Alkon: "The government's taking less of SOME people's money is what's wrong here."

No, I like to think that the government taking more of some people's money is what's wrong here.

momof4: "i can drive through any given neighborhood and pick out the rental houses with 90% accuracy."

sofar: "we saw some real doozies where the owners themselves had absolutely trashed their own homes."

They're the reason why you can pick out the rental houses with only 90% accuracy and not 100%.

I've owned a few homes and spent a lot of money on upgrades and improvements. I've also rented several homes and did not spend any money on improvements. However, on five of the homes I've rented the landlords paid me to make upgrades and improvements.

I guess anyone who gets a deduction I don't get is getting a handout I'm not getting, and that makes me all so envious and everything.

A homeowner who's been paying a mortgage payment of $xxyy.oo/month for 25 years gets less than a third of the deduction as someone who's been paying $xxyy.oo/month starting only a year ago, so I guess the long time homeowner should get all bent out of shape too.

It's not faaaaaaiiir!

Hi Isab,

Would you mind elaborating on what exactly you mean by this statement:

"A deduction is only good if you have a lot of income to write it off against, and are tettering on the edge of creeping into a higher tax bracket."

Why exactly would it make such a big difference if you happened to be close to the edge of the next bracket?

"The difference between committed and involved is the proverbial ham and egg breakfast: the chicken was involved, the pig was committed."

And thus the chicken contributes to breakfast, repeatedly, throughout its lifetime.

Why exactly would it make such a big difference if you happened to be close to the edge of the next bracket?

Artemis at May 12, 2017 1:22 PM

This is a bit hard to explain if you dont have a pretty good understanding of our progressive tax system.

The way income tax is set up, is low earners in each catagory pay nothing. Once their income exceeds a certain level they pay maybe ten percent in Federal taxes up until their income hits the next bracket at which point they pay 15 percent for all income that exceeds the ten percent bracket etc. up until the point where your income hits the top bracket of 39 percent and/or the AMT.
(I dont want to get into the AMT, it is complicated)

When you file federal income tax, you get an exemption for yourself, your spouse, and each of your minor children who live with you, and or any other dependents.

An exemption is different from a deduction.

Now to make prudent homeowners and renters equal, some years ago, the IRS established something called a standard deduction.

Contrary to Amy's screaming about this issue, it did the job.

This standard deduction is an amount the IRS determined was the average that a family might have in itemized deductions.

http://time.com/money/4082533/irs-new-tax-rates-standard-deductions-exemptions-2016/

The above link explains it pretty well.

So the higher your tax bracket is, the more you benefit from itemized deductions.

If you look at the link I included you will notice that you take a huge jump in taxes as a married couple filing jointly when your taxable income exceeds 75,300 dollars.

So what I am saying is if your mortgage interest deduction combined with your other itemized deductions is high enough to keep you out of that 25% tax bracket, it is worth more than if you are already somewhere in the middle of the 15 percent bracket, with your taxable income.

However, the trap most people fall into is, itemized deductions only become useful by the amount they exceed your standard deduction.

So, again, if you are a married couple filing jointly, and,you pay 8000 dollars in mortage interest and real estate taxes, and,you have six thousand dollars in other deductable expenses, you have 14000 dollars in itemized deductions.

Unfortunately, the standard deduction that you and your wife are allowed is 12,600 dollars, so your itemized deductions reduce your taxable income by only 1,400 dollars. 1400 times 15 percent reduces your tax bill by 210 bucks.

Now if your gross income was above a hundred K, and you had 20,000 dollars mortgage interest deduction and a total of 26000 itemized deductions, which pushed your taxable income below the 73,600 threshold and saved you payjng a 25 percent federal tax on that income, do you see how much more valuable that would be?

Still not as valuable as not paying the interest to begin with, but much more valuable when you are kept out of a higher tax bracket.

A better strategy in my opinion, for getting your taxable income down is to put as much as you can into your 401k. This money is deferred from taxation until you draw it out of your account, hopefully at a time when you are retired, and are in a much lower tax bracket. .

Hope this helps. Any more specific questions, I can try to look up for you.

Isab Says:

"The way income tax is set up, is low earners in each catagory pay nothing. Once their income exceeds a certain level they pay maybe ten percent in Federal taxes up until their income hits the next bracket at which point they pay 15 percent for all income that exceeds the ten percent bracket etc. up until the point where your income hits the top bracket of 39 percent and/or the AMT."

I am aware of all of this which is precisely why "tettering on the edge of creeping into a higher tax bracket." simply doesn't make a mathematical difference.

You stand to benefit more and more the deeper you are into a higher bracket... not the closer you are to a lower one.

For example, a family earning 300K stands to save much more than a family earning 235K off of the same deduction despite the fact that the family earning 235K is MUCH closer to the 28% bracket.

Essentially the family earning 300K will probably save ~33% on the entire deduction while the family earning 235K will save some portion at 33% and a larger chunk at 28%.

Maybe we are saying the same thing here... but I always get concerned when people talk about creeping into other brackets due to the common misconception that once you enter the next bracket it applies to your entire income. That is obviously not how taxes work in our marginal rate tax system... but people continue to get that wrong on a frequent basis.

In any case, I think it is more accurate to say that you stand to gain much more from a deduction the more it applies to highly taxed income than implying it has anything to do with being close or far from the edge of a bracket.

And thus the chicken contributes to breakfast, repeatedly, throughout its lifetime. ~ Gog_Magog_Carpet_Reclaimers at May 12, 2017 4:24 PM

Yeah, but the pig's commitment gives you bacon.

"You stand to benefit more and more the deeper you are into a higher bracket... not the closer you are to a lower one."

How so?

Not in actual dollars paid in tax, and most times not even as a percentage that you pay in taxes.

Too many deductions will often be wiped out by the AMT.

Feel free to set out a real life example with the numbers and deductions to illustrate your point, because Im not seeing it.

Also your federal tax rate depends on what state you are in, how they tax certain benefits, and how high those taxes are, and what forms of untaxed benefits and income you might be receiving. Your state taxes are deductble against your federal tax burden, but again only to a certain point.

I think you will find that most high earners get caught by the AMT, which is exactly what it was designed do to. It keeps them from itemizing their way into a much lower tax bracket.

Also I am only speaking about personal income taxes here. Corporate and business taxes are a totally different game.

Hi Isab,

I will try to sketch out some examples below with the understanding that a full tax return will obviously have many other complicating factors and possible deductions that are beyond the scope of our discussion (for example long term and short term capital gains/losses, dividend income, etc...).

Let's take 2 families and make the following assumptions:

1 - Family A has an adjusted gross income comprised exclusively of wages and taxable interest of 300K

2 - Family B has an adjusted gross income comprised exclusively of wages and taxable interest of 235K

3 - Both families achieve itemized deductions of 30K through a combination of accounting for state income tax, mortgage deductions, charitable giving, etc...

Now if we sketch out the numbers very roughly in these two scenarios, for family A that 30K deduction has a tax reduction value of ~10K because it comes off entirely within the 33% bracket.

For family B the math is only slightly more complicated because the 28% bracket begins at $231,450. As a result they see a reduction of 1171.50 for the first $3550 of the 30K deduction and 7406 for the rest of the deduction for a total tax reduction of $8577.50.

As you can see, family saved 10K and family B saved 8.5K and family B was actually pushed into the lower bracket by the deduction, which you suggested would be more beneficial.

It is actually more beneficial mathematically to be deeper into higher brackets than closer to lower ones.

"Homeowners are nicer than other people."

Trump, for example.

Of course don't forget the support that the mortgage interest deduction must be getting from the construction industry thugs. They get the high volume and high prices, you and I pay it to them via the tax system.