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1 1 (November 14, 2017)

handle is hein.crs/govceyy0001 and id is 1 raw text is: FF. ' riE SE-'.r h ,q. i Updated November 14, 2017 Key Issues in Tax Reform: The Mortgage Interest Deduction Tax reform proposals are generally structured around lowering tax rates while broadening the taxable base. The base-broadening component of tax reform could be most directly accomplished by eliminating special provisions in the tax code known as tax expenditures. One of the largest tax expenditures is the mortgage interest deduction (MID). On the one hand, modifying or eliminating the mortgage interest deduction could raise significant revenue. On the other hand, any change could affect individual homeowners and the overall economy. ark' Sunmr of C''~ a Currently, a homeowner may deduct the interest paid on a mortgage that finances a primary or secondary residence as long as the homeowner itemizes their tax deductions. The amount of interest that may be deducted is limited to the interest incurred on the first $1 million of combined mortgage debt and the first $100,000 of home equity debt ($1.1 million total). If a taxpayer has a mortgage exceeding $1 million, they may still claim the deduction, but they must allocate their interest payments appropriately to ensure that only the interest associated with $1 million of debt is deducted. Although many contend that the purpose of the mortgage interest deduction is to promote homeownership, this was not the deduction's original purpose. When laying the framework for the modern federal income tax code in 1913, Congress recognized the importance of allowing for the deduction of expenses incurred in the generation of income, which is consistent with traditional economic theories of income taxation. As a result, all interest payments were made deductible with no distinction made for business, personal, living, or family expenses. It is likely that no distinction was made because most interest payments were business related at the time and, compared to today, households generally had little debt on which interest payments were required credit cards had not yet come into existence and the mortgage finance industry was in its infancy. Among those who did hold a mortgage, the majority were farmers. For more than 70 years there was no limit on the amount of home mortgage interest that could be deducted. The Tax Reform Act of 1986 (TRA86; P.L. 99-514) eventually restricted the amount of mortgage interest that could be deducted and limited the number of homes for which the deduction could be claimed to two. Mortgage interest deductibility was limited to the purchase price of the home, plus any improvements, and on debt secured by the home but used for qualified medical and educational expenses. Subsequently, the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) made a number of additional changes that resulted in the basic deduction limits that exist today. Based on 2014 IRS data (the most recent year available), 44% of all homeowners claimed the mortgage interest deduction. Among the 56% of homeowners who did not take advantage of the deduction, 36% had no mortgage, and hence no interest to deduct. The remaining 20% of non- claimants had mortgages, but likely either (1) were toward the end of their mortgage payments so that the deduction was not worth much, (2) lived in a state with low state and local taxes and thus claimed the standard deduction, or (3) lived in a low-cost area and therefore had a relatively small mortgage. In 2014, the deduction was claimed on about 22% of all federal income tax returns and 74% of itemized returns. 'Propo\3w '. R,-b n t3h M0) The Tax Cuts and Jobs Act (H.R. 1), introduced on November 2, 2017, proposes reducing the maximum mortgage amount eligible for the deduction from $1 million to $500,000 for new mortgages. The bill would also eliminate the deduction for interest paid on mortgages on second homes and home equity loans. The Senate Finance Chairman's mark of H.R. 1 proposes only eliminating the deduction for interest on home equity loans. The Congressional Budget Office (CBO), in its December 8, 2016, Options for Reducing the Deficit report, presented the option of converting the mortgage interest deduction to a 15% nonrefundable tax credit and limiting the eligible mortgage amount to $500,000. The ability to deduct interest associated with second homes or home equity debt would be eliminated. The conversion would take place gradually over six years. The Unified Framework for Fixing Our Broken Tax Code, issued by the Office of the Speaker on September 27, 2017, states that it would retain the mortgage interest deduction. The House Republican Conference's A Better Way tax reform blueprint plan calls for the Committee on Ways and Means to evaluate potential options to increase the deduction's effectiveness and efficiency. Regardless of the committee's findings, the plan states that the deduction will not be altered for those who continue to itemize, even if the homeowner refinances. The tax reform blueprint does not suggest options for altering the deduction. Former House Ways and Means Committee Chairman Dave Camp's Tax Reform Act of 2014 (H.R. 1) proposed preserving the deduction but reducing the eligible mortgage amount to $500,000 over a four-year period. To lessen the impact on the housing market, the new limitations would only apply to new mortgage debt. Furthermore, the proposal included a grandfather provision for refinanced debt if the original mortgage debt was incurred prior to the mortgage limits being reduced. p\w -- , gn'a', goo mppm qq\ a , q 'S I 11LULANUALiN,

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