Retain Mortgage Interest Deduction

2012 March 23
Click History for a list of changes and updates.

      Most changes in the tax code have at least two effects:  (1) the direct effect of the change, and (2) the indirect effect(s) from responses to reduce tax liability.  Any change is the tax code should consider both effects.  In may cases, the indirect effects may be more significant. 

      The continuation of this post discusses the direct and indirect effects of the mortgage interest deduction. 

Don Nordeen
==========
Continue reading Retain Mortgage Interest Deduction.

• Key Words:  income tax, interest, tax code

Click Continue for Post Continuation plus Comments.  Or Click Show All for Above plus Post Continuation and Comments.

---

Retain Mortgage Interest Deduction (continued)

      One of the deductions affecting the personal income tax collected is the mortgage interest deduction.  Obviously, the direct effect is the reduction in taxes collected if the mortgage interest can be deducted, which can occur if the total deduction exceeds the standard deduction allowed.  If the mortgage interest and other eligible deductions do not exceed the standard deduction, the income tax can be reduced if other investments can be converted to paying down the mortgage principal.

      The reason this can exist is that all interest and investment income, unlike mortgage interest paid, is taxable without having to exceed some minimum.

      If the mortgage interest deduction is eliminated, taxes can be reduced even more by converting other investments to paying down the mortgage.  This illustrates the indirect effects of changes in the tax code.

      Currently, all interest and dividends are taxable.  However, interest paid is deductible only in some circumstances.  If mortgage interest is no longer deductible, the incentive will be to move investment from interest- and dividend-earning investments to payoff of mortgages.  To maintain financial flexibility, citizens would likely use home equity lines of credit to provide for unanticipated needs.  The combination of investment changes could create a major shift — and possible disruption — in financial markets. 

      The simple solution that avoids double taxation and major effects on financial markets is to make dividends (dividend reduction method) and interest (all interest paid, not just mortgage interest) deductible (expenses) where paid, and to make them income where received. 

---

• History:  Changes are usually identified in the text with the date which facilitates searching by date. Edits are usually noted by add and delete changes. 
• 2012 Mar 23 — Initial Post
• Links:   Retain Mortgage Interest Deduction at [http://curntbk.blogspot.com/2012/03/retain-mortgage-interest-deduction.html]

---

___________________________________________________________________________________
Copyright 2005-2012 © Donald L. Nordeen.  All Rights Reserved.  See Copying Posts on This Weblog.
••• End of Post •••