A Boston Tea Party …(Take My Deductions)
It must have been 5th or 6th grade when in social studies we had to read the book “Johnny Trumane”. The book was about a boy who lived in Boston during colonial America. The story revolved around the Boston tea party. I remember how I enjoyed reading about the reaction to being taxed without representation. Throwing tea in the harbor of Boston was brave and just tyranny by a people fed up with to much tax.
Fast forward two hundred and thirty years or so, a tax reform committee is about to issue recommendations for tax reform. One of their recommendations will call for the discontinuing of the home mortgage interest deduction in return for a flat fifteen percent tax rate. The removal of the interest deduction is being called DOA before the committee has even formally released its findings. The willingness of the American people to pay higher taxes in order to keep a deduction is amazing to me.
I do not understand the contradiction of refinancing a home loan in order to lock in a lower interest rate yet that same person would also prefer to have as much interest as possible to deduct from a tax return. In order to maximize the interest deduction on the tax return should one not refinance with a higher locked in interest rate? This simple argument displays the fallacy of the home mortgage interest deduction. It means nothing. It only means something in the current tax system, which needs to be reformed. In a flat tax the first $35,000 will be tax-free. If you run the numbers you will find you will always win even with the loss of your interest deduction. So I say please, please, please take my deductions, take all of them. I would rather keep more of my own hard earned money.
posted by schumacher @ 12:12 PM
2 comments
2 Comments:
Hello, just read your article. I think your point is taken but I think you have some misinformation in the article. The report that I read that was forwarded out of the Blue Ribbon Panel did not have anything in there about a flat tax. There would still be escalating tax rates with separate brackets for each tax rate, but the rates would be lower than today.
The part about the 15%, if memory serves me, has to do with a credit against tax (similar to the child credit or education credits) for mortgage interest that a homeowner pays. The current mortgage ceiling amount on which interest could be taken into account would drop from the current $1 million, to a lower amount of somewhere in the range of $400,000. This would then be staggered to different levels based on the housing prices in different parts of the country.
So, really, the 15% mortgage interest credit will not have any effect on what many current lower-middle class families. This is because the current 15% tax bracket goes to about $60,000 in taxable income. If a family has $10,000 in mortage interest on a $250,000 loan, they receive a tax benefit of $1,500. Under the new proposal, this same family would not have the $10,000 mortage interest deduction. Instead, they would have a credit against tax in the amount of $1,500 ($10,000 mortage interest multiplied by the 15% credit amount). This is the same benefit as under the current system.
The people who will be really hurt under the new mortage deduction rules will be those homeowners who have very expensive homes in excess of half a million dollars. Their mortgage interest amount that is allowed will be less than under the current system. They will still pay a higher rate since presumably they will have a higher income but they will only get a 15% benefit (as a credit against tax) compared to a higher deduction that reduced tax at a higher effective tax rate.
As I said, your point is taken. But for a person like me, the mortgage deduction has no effect. The part that I do like about the new proposal is that it I'll be paying a lower tax rate albeit still at graduated rates. So any time I pay less tax, I'm happy.
I evidently did not make my self clear enough. I am saying the commission has not gone far enough in tax reform. A flat tax is what should be recommended. In either case the loss of home mortgage interest should not be a reason to prevent one from moving to a lower tax rate.
Post a Comment
<< Home