Did the home sale tax exclusion kill the economy?

Did the 1997 tax law change that allows home sellers to exclude hundreds of thousands of dollars from their taxable income contribute to today's economic crisis?

Maybe.

At the blog Cafe Hayek, economists have been examining the housing bubble and what role public policy might have had in the housing price increases and the subprime meltdown.

"Maybe it wasn't speculative mania," writes Russell Roberts. "Maybe much of it was due to changes in public policy."

A tax boon for home sellers: The specific policy change under the economic microscope is one of the most hallowed homeowner tax breaks.

For the last 12 years, homeowners have been able to avoid capital gains taxes on net home sale profits of $250,000 if they are single taxpayers and $500,000 if they sellers are married couples filing jointly.

The beauty of the current law is that to get this tax break you don't have to buy another home within a specific time frame, as the home-sale tax law demanded of most pre-1997 sellers. You just have to live in the property as your primary home for two of the five years before selling.

When the bubble was inflating, folks made small fortunes buying homes, living there for a few years and then selling for a nice, nontaxable profit. It was a literal cottage (or ranch or colonial) industry.

The financial sector quickly joined home buyers, sellers and the housing industry in taking advantage of the once quite lucrative real estate market.

Now many folks are stuck with homes that are worth less than they paid, negating the benefit of the home sale exclusion.

And the lenders who helped any and everyone, regardless of qualifications, get into the housing game have helped bring the whole U.S. economy to the brink.

Some connected the dots: The contribution of the tax law to the housing bubble, says Roberts, has been largely overlooked.

"Do you think that had any effect on the price of housing? You bet it did. Vernon Smith [professor of law and economics at George Mason University and 2002 Nobel Laureate in economics] pointed out the impact in December 2007:

The joint housing and mortgage-market crisis once again reminds us that all financial implosions stem from the same cause: borrowing short and lending long without enough equity to weather periodic storms in the gap between.

But this bubble was different. Besides being fueled by housing purchases and repackaged loans, each with inadequate equity -- doubling down with other people's money -- at the end of the capital-gains rainbow was the right to take up to $500,000 of profit, tax free.

Cafe Hayek also cites BusinessWeek's Christopher Farrell 2005 article in which he said the housing boom at that time was built on disproportionate tax incentives that keep the stock market's rise in overdrive.

"As much as possible, the tax code shouldn't bias investment decisions," Farrell writes. "As it is, the tax code is too heavily weighted in favor of housing. The Urban Institute calculates that the government provides about $147 billion in subsidies to homeowners, including the mortgage-interest deduction and capital gains exemption."

The Tax Foundation's Tax Policy Blog, which gets a big hat tip for pointing us to Café Hayek, also has some thoughts on the economic implications ofhousing tax policy.

Breaking up tax breaks is hard to do: Of course, any time proposals to change homeowner tax breaks are offered, they are quickly scuttled. The most recent such instance was the President's Advisory Panel on Federal Tax Reform. Itssuggestions were quickly shelved.

Have you sold a home and taken tax advantage of the home-sale exclusion? The hubby and I have done so a couple of times.

And I must admit that the tax law worked quite nicely for us when weunloaded sold our Florida home in early 2005 just before that region's housing market crashed.

Would you support a change in the tax law to even out the taxes on all capital assets? Of do you think that homeowners should get special tax considerations (detailed here), for costs they incur while living in their properties as well as when they sell?

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Economy killing home tax break, redux

It's good to see the New York Times finally caught up. In today's edition, the paper looks at how a Tax Break May Have Helped Cause Housing Bubble.

It's a comprehensive review of the same topic blogged about here on Don't Mess With Taxes back in September in Did the home sale tax exclusion kill the economy?

You know the tax break that I talked about months ago and the Times examines today. It's the exclusion from taxable income of large amounts of profit reaped on the sale of a principal residence. Single filers can shield up to $250,000 from the IRS; file jointly and you get double the tax exclusion.

A break not offered elsewhere: The upshot of both the Times' article and the studies I cited in my earlier blog post is that the generous home sale tax exclusion law likely helped fuel the run up in property values.

Since real estate got this tax benefit not afforded other property such as stocks, housing became the hot investment. And our capitalist system soon began, at least in this sector and much to the belatedly admitted shock of former Fed Head Alan Greenspan, to run amok.

Of course, few things in life are cut and dried, so it's irresponsible to point fingers (your choice of digit) at just the tax code's influence on the housing market. But it certainly is a factor that can't be ignored.

The touting of home tax breaks: For decades, every lender and real estate agent has touted the tax benefits of owning a home and buyers have rationalized over spending on a residence by parroting the tax code breaks.

And in many, many cases everybody has come out just fine under the current arrangement. So, as the adage goes, we need to be careful about throwing out the baby with the bath water.

Who knows, given Capitol Hill's penchant for tweaking tax laws, there may one day be a refinement of this tax break. Earlier this year, lawmakers decided that the home sale's work-around application to second home offered a bit too much of a tax break. Beginning Jan. 1, 2009, a "Sold!" sign on additional real estate will cost the sellers more.

I doubt the primary residence sale exclusion will ever be rescinded, but we might one day see it made a bit more difficult, perhaps by requiring a longer occupancy time before reaping hundreds of throusands in nontaxed profits

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Accidental' mortgage interest deduction

The write-off of interest paid on a home loan, one of the most popular tax breaks out there, actually sort of sneaked into the tax code.

That's the word from Dennis J. Ventry Jr., acting professor of law at the University of California, Davis, School of Law. Ventry examines this iconic tax deduction in his paper The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest.

You can find out more about this itemized deduction's history and why many think that while it has been good for homeowners, it's been bad for the economy in my other blog, Eye on the IRS.

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Tax policy and the American homeownership dream

Joe Nocera in his Wake-Up Time for a Dream column today looks at whether the "financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home."

The question isn't new (I blogged about the madness of the mortgage interest deduction back in 2006), but it's worth reconsidering since this past week some lawmakers again began pushing for legislation -- and tax benefits -- that ostensibly make homeownership possible for more people.

Nocera's New York Times piece looks at the political history of the American dream of homeownership and examines the views of various housing advocates, journalists and economists on how we deal (or don't) with it.

The viewpoint that caught my eye comes from Edward Glaeser, a Harvard professor and contributor to the newspaper's Economix blog. Glaeser said that if homeownership had to be encouraged, an idea of which he was not at all convinced, it should be through a "flat homeowners' tax credit" rather than a home mortgage deduction, rather than with a tax break that essentially bribes people to buy bigger houses.

I agree with Glaeser. So do lots of others who in recent months have asked is it time to kill the mortgage interest tax deduction?

But it's not likely that we'll get rid of the home mortgage interest deduction, also known as the third rail of U.S. tax policy.

Nocera prefers the housing tax policy approach suggested by Gary Rivlin, author of Broke USA, about whom I just blogged in connection with refund anticipation loans.

Rivlin says the big policy mistake America has made as a culture is in promoting policies that encourage all home purchases, under any circumstance. 

"Why should the government help me buy a second home? Why should it subsidize a refinancing?" Rivlin asked. "We have missed the essential piece. The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own."

The limiting of home-related tax breaks is a more financially and politically feasible option. In fact, in recent years, Washington, D.C., has taken steps to wean property-rich taxpayers from some tax benefits, such as the basis change for calculation capital gains on the sale of a vacation home.

Nocera's article offers a lot of ideas worth consideration when it comes to homeownership and how we deal with it through our tax and financial policies.

Given the state of the current economy (and future economic conditions), we -- taxpayers, homeowners and legislators -- need to start looking at tax-subsidized homeownership now.

source:dontmesswithtaxes.typepad.com

Builders' message to Congress: Don't mess with mortgage interest deduction

OK. The National Association of Home Builders (NAHB) delivered the message in the headline, but the trade group says that the admonition actually comes from a recent poll of likely voters.

The poll conducted earlier this month found that three of the five tax deductions people strongly support are connected to homeownership.

The mortgage interest write-off tops the home-related tax breaks, just a percentage point behind the itemized deduction for medical expenses.

The other three deductions that polled folks want to keep are for state and local taxes (including property taxes), charitable deductions and home equity loan interest.

Thanks for the information, NAHB, but there's really nothing to worry about. 

The last time the topic of ending the mortgage interest deduction got any serious consideration was back in 2005 when the President's Advisory Panel on Tax Reform, appointed by Dubya, suggested replacing this deduction with a tax credit. The report was dead on arrival.

So why do the survey? As I note in my Bankrate Taxes Blog item on this subject, Mortgage interest deduction safe (which I encourage you to check out as soon as you finish here!), politics plays a big role.That's obvious from the poll's title: Nationwide Survey of Likely Voters.

With the Nov. 2 midterm elections are coming up, what better way to keep homeownership and its many beloved tax breaks in the minds of candidates than by telling them what voters want?

The NAHB poll also was released just eight days before the first-time homebuyer credit finally expires, reminding lawmakers of the most recent tax benefit for the housing industry homeowners.

Possible tax reform concerns: And finally, the housing folks wanted their concerns, I'm sorry, the likely voters' concerns, out in time for the Senate Finance Committee hearing held Thursday on tax reform.

While the home mortgage interest deduction was only discussed briefly by one of the witnesses at the session to review the lessons of the 1986 Tax Reform Act, I guess the housing industry (and probably the mortgage lending sector, too) gets a little jittery whenever tax reform comes up.

And to cut them some slack,there is a tiny bit of room for worry. 

Let's face it. Although the majority of poll respondents strongly support housing tax breaks, about a third of Americans aren't homeowners. Heck, with today's foreclosure rate, the ownership level has probably dropped.

And even folks who do own homes don't always get to take advantage of the tax write-offs associated with their residences.

To claim the mortgage interest deduction and all of your property taxes, you have to itemize. Most people, including some homeowners, don't. They find that the standard deduction amounts are larger than what they have in itemized expenses.

Also, folks who've paid down the bulk of their mortgage or paid it off entirely don't have a lot or any mortgage interest to deduct.

Still, the deduction and other home-related tax breaks are sacrosanct to U.S. taxpayers and politicians. TheAmerican dream and all that.

So regardless of whether the mortgage interest deduction or other home tax breaks are threatened, expect to see continued preemptive strikes -- like the NAHB poll -- to make sure they stay just as they are.

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Rethinking mortgage tax breaks

As soon as people got through chewing up and spitting out the debt reduction panel's suggested changes to Social Security, they turned to its next controversial recommendation: reducing tax breaks for homeowners.

Blogs and traditional news media are abuzz about proposals by the chairmen of the National Commission on Fiscal Responsibility and Reform to tweak mortgage-related tax benefits. Most headlines scream some version of "death imminent for the mortgage interest deduction."

That is indeed one option in the draft report (actually a 50-page PowerPoint presentation) released last week by commission co-chairs Erskine Bowles, former chief of staff in the Clinton White House (at far left in the photo below), and Alan Simpson (right), former Republican Senator from Wyoming.

But the media focus has been a bit hyperbolic. 

Taxes, the deficit and reality: Elimination of the mortgage interest write-off, as well as most other tax deductions, would allow for a dramatic drop in individual income tax rates under the chairmen's Zero Plan.

Without having to make up for myriad tax expenditures, the Zero Plan would create just three personal income tax brackets of 8 percent, 14 percent and 23 percent.

That, of course, won't happen. So the commission chairmen offer scenarios where at least some form of the mortgage interest deduction remains.

They also kick around a second option, fashioned after the tax reform planintroduced earlier this year by Sen. Ron Wyden (D-Ore.) and Sen. Judd Gregg (R-N.H.), that calls for limits to the mortgage deduction.

Under the Wyden-Gregg plan, the write-off would be limited to interest on mortgages for primary residences. There wouldn't be any Schedule A claims for loans on second homes or home equity loans.

And that remaining home loan interest deduction would be allowed only for mortgages of $500,000 or less.

The loan cap would mean that the tax code -- that is, all us taxpayers -- wouldn't be subsidizing suburban McMansions that so many buyers opt for because, in part, they now can deduct interest on home loans of up to $1 million.

A touchy tax break subject: All of the proposals in the draft debt report are great starting points for a long-overdue discussion of the constantly growing list of tax breaks and the need for real tax reform.

The home mortgage deduction in particular needs to be reconsidered. I'll be the first to admit that it's provided the hubby and me lots of tax saving over the years. We're in our fifth house and also refinanced a couple of times, happily writing off all those mortgage loans' interest each April.

But this tax break, which is claimed by only about a quarter of taxpayers, is incredibly expensive. The New York Times notes that the mortgage interest deduction will cost the U.S. Treasury $131 billion in forgone revenue in 2012.

Again, because homeownership is such an emotional -- and heavily lobbied -- issue, the deduction won't be eliminated, even though homeowners in other countries (Australia, Canada) seem to get by just fine without it.

But capping the size of mortgages on which interest can be deducted is a reasonable first step.

Previous mortgage tax break proposal ignored: I suspect, however, that the draft report (or the final full one due to Congress by Dec. 1 if enough commission members agree to its content) will be for naught.

I'm basing my assessment on recent Washington, D.C., history. Remember Dubya's blue-ribbon tax reform panel? Don't feel bad; not many folks do.

The prior Administration's advisory board, also a bipartisan collection of respected fiscal and political types, suggested back in November 2005 that we replace the mortgage interest deduction with a tax credit equal to 15 percent of interest paid on a principal residence.

As a credit, the amount would be subtracted directly from any tax liability. And itemizing wouldn't be necessary to claim it, making things easier for filers, too.

None of that mattered. In fact, the audacity to target the mortgage interest deduction doomed that previous panel's report, which was never heard from again.

Maybe I'll be wrong.

Maybe the debt commission's tax suggestions will get some serious consideration.

Maybe the new blood on Capitol Hill will help kick-start tough budget and tax talks and keep them going.

And maybe we voters will one day quit punishing lawmakers and candidates who tell us the hard truth about what it takes for a government to live within its means. That it requires not just program cuts, but taxes to pay for what's left.

But I'm not holding my breath.

source:dontmesswithtaxes.typepad.com

The unfairness of housing tax breaks?

As Members of Congress, fresh out of the woodshed they were taken to when they went back to visit constituents during the Easter break, move forward with a new housing relief plan, the New York Times Economic Scene columnist David Leonhardt takes a look at a previous attempt to address housing issues, specifically residential tax breaks.

The focus of the column, Playing the Housing Blame Game, is the ill-fated work of the President's Advisory Panel on Federal Tax Reform.

One of the Panel's key, and most controversial, suggestions was to replace the mortgage interest deduction with a tax credit. The Panel provided several reasons for the change, the prime one being that a credit would still benefit homeowners but be fairer. 

Many low- and middle-income families, noted the Panel, don't benefit from the deduction because they don't itemize, so the mortgage interest tax break essentially subsidizes wealthier taxpayers who don't need as much help, tax or otherwise, to get into their own homes.

When the Panel's report was issued in November 2005, I was among thosecynical realistic enough to know it was going nowhere fast (and said so in this posting). Part of the reason for my (and others') prediction that the report was DOA was the sacrosanct mortgage interest deduction proposal.

And Dubya, the man who asked for the tax overhaul analysis in the first place, sounded the Panel report's official death knell a month later (noted in this posting), by quietly burying the suggestions.

Mortgage interest debate: But discussion of the mortgage interest issue has continued.

In March 2006, financial journalist Roger Lowenstein noted that "… the tax break isn't even doing a lot of mortgage-interest paying homeowners much tax good." (My blog post on Lowenstein's article can be found here.)

And today, Leonhardt writes:

… [T]he people who created the current tax code -- in the White House and in Congress, both Democrat and Republican -- deserve some blame, too. They have built a system that treats home purchases more favorably than just about any other form of investment.

The biggest of the government's real estate subsidies is the well-known and well-loved mortgage-interest deduction. It allows people to avoid taxes on any income that is used to pay interest on mortgages, whether the mortgage is for a primary residence or a vacation home, up to $1 million in combined loan value. "Effectively," said Charles Rossotti, an I.R.S. commissioner under President Bill Clinton who served on the tax panel, "it encourages people to overinvest in housing."

Leonhardt also notes, as many others have, how this tax break favors only those who itemize, i.e., the more well-to-do taxpayers.

And he points out the distinct advantage the primary residence sale tax exclusion gives to money put into personal real estate vs. other types of investment:

There's just no reason the government should be encouraging people to invest a spare $100,000 in a bigger house rather than, say, in the stock market, where a company might be able to put the capital to more productive use.

Winners, losers, timing: The hubby and I are homeowners. We don't consider ourselves wealthy, but we've always been able to claim the mortgage interest deduction and we will continue to do so as long as it's available.

And in past home sales, we've been able to make good use of the tax exclusion. In fact, we just used some of the nontaxed money we took away from our Florida residential sale three years ago to totally redo the backyard of our Texas home.

Those who point out the problems with these residential tax breaks have some basis for their objections. But the difficulty in making any sweeping changes, both politically and economically, is that the hubby and I have lots of housing peers.

While there are some folks who abused the system, sequentially flipping homes simply to make money on the price appreciation or getting oversized mortgages because they could deduct the interest, a lot of us have lived within our means, purchased our homes as places to live not as investments, and are very grateful for the tax help we get from our abodes every April.

I'll guarantee you that if Washington, D.C., ever gets around to actually making any sweeping changes to the current home-related tax breaks, we'll be making as much noise then as struggling homeowners are now.

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Mortgage interest deduction madness

So you think the mortgage interest deduction helps make homeownership possible for most Americans?

Think again, says Roger Lowenstein.

In Sunday's (March 5) New York Times Magazine article "Who Needs the Mortgage-Interest Deduction?," Lowenstein writes:

"But when exactly did the interest deduction begin? I had often heard my father rhapsodize about the G.I. Bill of Rights, which was enacted in 1944, when he was serving in the Pacific, and which a few years later was paying his tuition at law school; the mortgage-interest deduction came to be joined in my mind as an adjunct piece of social policy. One got you an education and the other got you a house: together, they bought entree to the middle class.

"Since the great migration to the suburbs also occurred after World War II, I assumed that the interest deduction was of a similar postwar vintage. Over the years, it has become an American folk legend: the government invented the mortgage-interest deduction to help people buy their own homes, and the level of homeownership has risen ever since.

"What part of the legend is true? Basically, none of it."

Lowenstein looks at the evolution of our tax system and how and why the interest deduction came about. The tax break's usefulness to homeowners, he contends, was never the driving force for creation and continuation of interest deductions.

And today, the tax break isn't even doing a lot of mortgage-interest paying homeowners much tax good.

Lowenstein cites U.S. Treasury stats that show among homeowners, only about half claim the deduction. When you add folks who don't own homes into the equation, more than 70 percent of tax filers don't get any benefit from the deduction.

And what does it cost the country to provide a tax break for less than 30 percent of U.S. taxpayers, most of whom are higher-income? This year, says Lowenstein, it will be $76 billion.

Lowenstein speaks to economists who say that the deduction doesn't really help more Americans buy houses. Homeownership here, he reports, is about the same as in Canada, Australia and England, where interest isn't deductible.

He further argues that the mortgage deduction really helps potential home sellers more than buyers or owners: "Research suggests that without the deduction, people would still buy the houses they do now; they would just cost a little less. In effect, the market would adjust downward to reflect some of the decrease in buyers' purchasing power."

That certainly explains the opposition of real estate agents to the proposal by the President's Advisory Panel on Federal Tax Reform to eliminate the deduction. You can find out more about the Panel's proposed alternatives and Realtor reaction in my blog post from November.

And the fact that the real estate professionals are vocal, organized and contribute to the election and re-election efforts of politicians explains why most lawmakers in Washington, D.C., also have turned up their noses at the Panel's proposal. Even the guy who asked for it, the president, put the brakes on the effort (blogged here) shorly after the Panel's report was released and subsequently has publicly stated that the mortgage interest deduction will not be removed from the tax code.

OK, so it's clear why the realty industry hates the idea: Prices of homes would decrease, meaning the commissions would go down with them.

And politicians are generally loathe to change things that could endanger their fundraising and re-election efforts.

But if most Americans aren't getting a tax benefit from the mortgage interest deduction, why isn't this majority raising a ruckus for tax system changes that are fairer to them? Three reasons.

First, 99 percent of U.S. homeowners will one day be home sellers, so if the deduction, as Lowenstein argues, helps keep prices up for that eventual day, then they say "good."

Secondly, thanks to decades of anti-tax propaganda, very few of Americans are willing to give back any tax break even if it's not doing most of us that much good. We accepted the limits on mortgage interest (up to $1 million in home indebtedness) that were part of the 1986 Tax Reform Act. But that cap was part of a larger bill that drastically cut ordinary rates. Plus, 20 years ago home prices were not so out of control (as discussed here), so that $1 million amount seemed a safe limit for most home buyers.

And then there's the third reason, a purely emotional one that is hard to counter with numbers and sound tax policy arguments. It is that the American dream of owning a home has a bit of a dark side.

Sure, many people are happy to get into any home of their own … at first. But once there, the drive toward property escalation tends to take over. We want to be able to use a mortgage to buy another house, a bigger house, eventually one that's more than we really need or can afford.

Once there, we'll claim the interest deduction and, from a window high in our new castle, we'll look down smugly on those who haven't reached the heights of homeownership -- or depths of debt -- that we've finally attained.

TODAY'S TAX TIP: It might not be good tax or social policy, but our tax system is full of advantages for homeowners. As long as they're there, take full advantage of the breaks. In addition to the mortgage interest deduction, you can write off points you paid for your loan, home equity debt, property taxes, even a large portion of any profit you make when you do sell. Get details on these tax benefits of homeownership in this story.

Festival fun! The 13th edition of the Festival of Frugality, "a weekly compendium of the finest from the frugal blogger," is now up and includes my confession of coupon clipping. This week's host is Simply Thrifty, so head on over there for some money saving tips.

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A chink in the mortgage interest deduction armor?

The Treasury Department on Friday delivered a report to Congress that it says "provides a path forward for reforming America's housing finance market."

Reforming America's Housing Finance Market, a joint effort by the Departments of Treasury and Housing and Urban Development, focuses on the  Obama Administration proposal to "wind down Fannie Mae and Freddie Mac and shrink the government's current footprint in housing finance on a responsible timeline." 

But the plan also examines other housing reforms that could help fix what it calls the fundamental flaws in the mortgage market. These include stronger consumer protection, increased transparency for investors, improved underwriting standards and the general catch-all "other critical measures."

One of those other measures appears on page 25 of the report. It's only a fleeting mention of what most consider a sacrosanct tax break, the itemized deduction of mortgage interest.

But that it was mentioned at all has sent shudders through the housing and real estate industries, as well as giving homeowners pause. 

Here's the passage from the report:

Incentive for Investment in Housing. Government support makes investment in housing more attractive. While this can broaden access and lower costs for borrowers and communities, it can also draw investment away from other areas that may lead to greater long-term growth or job creation and it can inflate the value of housing assets, possibly leading to larger boom and bust cycles. Without government support, however, some of the capital invested in the housing market today may simply move to investments outside the United States that offer better risk-weighted returns. Other government policies, such as tax incentives like the mortgage interest deduction and other tax credits can also encourage investment towards housing over othersectors in the economy.

If you're not a real estate agent or a home builder or a person who claims thousands of dollars in mortgage interest on each tax return, you've got to agree that Treasury and HUD have a point. Our economy has been housing heavy and we're now paying the price. 

Heck, even if you do personally benefit from the mortgage and other home-related tax breaks, if you're honest with yourself, you've got to admit that we're getting a deal from Uncle Sam that many of our fellow taxpayers aren't. And folks in other countries seem to buy homes just fine without any tax deduction help from their governments.

But logic doesn't make the possibility of losing the home mortgage interest deduction any easier to take.

Sure, the premise is that overall rates would be lower, as proposed by the deficit commission in its Zero Plan, so that we interest-paying homeowners wouldn't miss the deduction. But I know I'd like guarantees that the rates would indeed drop. I'd also like to run the numbers myself to be sure.

And that's just me (and the hubby). We also have upset industry reps, aka contributors to political action committees (PACs), that are already gearing up to fight any attempt to repeal this (and other) home-related tax breaks.

Still, its' getting tougher to justify such tax policies. There's the ginormous federal deficit and the gung-ho group of newly elected Representatives and Senators who want to cut any and everything.

So the once well-protected mortgage interest deduction might just have a chink in its armor.

Of course, things rarely happen quickly on Capitol Hill. There will be many hearings and debates and bills introduced and amendments tacked on to other legislation and rants and raves from hosts and guests on television and radio programs.

But eventually, there's likely to be some change in the mortgage interest deduction policy.

When it does happen, the change will be phased in or, depending on your perspective, the deduction will be phased out, so as not to cause immediate shock to the housing sector and taxpayers claiming it.

Where to start: There are some relatively easy adjustments that could be made.

First, restrict the interest deduction to primary residences only.

Right now, you still can deduction interest on a loan for a second home. Owners of second homes already got whacked tax-wise a couple of years ago when the law was changed to essentially require them to pay more taxes on any sales profit of their other properties.

Also do away with the deductibility of home equity loans or home equity lines of credit (HELOCs). These obviously were more popular when home values were higher. But the fact that people aren't getting so many home equity loans now just supports the argument that we can do without them.

Not to be too maternal here, but folks really need to quit thinking of their home as an ATM. Yes, I know some people use equity loans to improve their residences or made critical repairs. Others get the money to pay for a child's education. To them I say start saving.

Finally, lawmakers can limit the total mortgage amount upon which interest deductions are allowed. Right now that's $1 million. Cutting it in half should send a few more tax dollars Treasury's way without disrupting the deduction for most homeowners.

I'm sure these and many other suggestions regarding the mortgage interest deduction and other homeowner tax breaks will be discussed as Congress works it way through the budget process.

Do you claim the mortgage interest deduction? Did the tax break make a difference to you when you bought your house? Would you give it up for lower tax rates?

In addition to reading the full report, you can find more on the proposals and reaction to them in the New York Times, the paper's DealBook blog, Reuters,TaxVox, Business Insider,  GPB News, the Washington Post and NPR.

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Pay January mortgage now to get added interest deduction

If you're still looking for ways to reduce your 2011 tax bill, consider making your January mortgage payment now instead of early next month.

Accelerating your house payment even by just a day will get you an additional tax deduction on your Schedule A for the interest paid. And that advice earns it recognition as the last Weekly Tax Tip of 2011.

No, it's not prepaid interest, which usually isn't fully deductible in the tax year in which it's paid.

Unlike rent payments, which you give to your landlord upfront to cover your upcoming occupancy period, house payments are made at the end of your lived-in month.

So your payment to the bank on the first of each month covers the previous 30 or so days.

And that means the interest you're paying a tad early now is for December.

Of course, paying it now instead of January means you'll have to do the same thing this time next year if you want to keep your itemized deductions bumped up as much as possible.

But if the extra interest deduction will help trim this year's taxes, it's probably worth getting your January mortgage payment in ASAP.

source:dontmesswithtaxes.typepad.com