Fiscal Cliff Puts Home Mortgage Interest Deduction in Play

Nov. 12, 2012 - PRLog -- The news over the next six weeks or more will be filled with debates about what to do about the pending fiscal cliff, and whether to change the law on the mortgage interest deduction, an important middle class tax benefit.

According to Los Angeles mortgage consultant Bill Rayman:  "The divided government reelected into office on November 6, 2012, now has 50 days to do what they haven't been able to do in two years…Compromise.  Specifically the House, Senate, and White House must either create new legislation that would change existing law prior to January 1, or those laws will go into effect."

Specifically, the temporary reduction by 2% of employee contributions to Social Security will end; the Bush tax breaks that primarily effect the top 2% of taxpayers, will be eliminated; and the sequestration bill that was created to cut the budget by $1 trillion dollars over 10 years will take effect.  To add to the potential impact on the economy, various new Obamacare taxes go into effect.

Rayman points out that many pundits have weighed in on the possible effect of allowing all of these things to happen without any intervention.  "Some even suggest it might be a good thing to endure some short term strong medicine in order to heal a sick and worsening economy.  With current growth not even keeping up with inflation, most agree going over the cliff will mean the country goes back into recession.   With the Eurozone already in trouble, a recession here is likely to create a spiral of bad economic results around the globe.  So, it is unlikely that Washington is going to do nothing at all."

Based on the statements of the key players, one could easily conclude the following:
    ● The temporary reduction in Social Security contributions will not be renewed.
       This will have an immediate effect on all payroll checks in the US of 2% more  
       being withheld.
    ● The budget cuts will be put off for 120 days.  
    ● The tax breaks in the Bush era tax bill will likely also be put off until Spring, but
       there is at least a chance that some kind of framework will be agreed upon.

Part of the framework that the Republican-dominated House of Representatives is insisting upon is that any new tax revenues come from loophole closing rather than rate increases.  Rayman notes: "The Senate Democrats seem willing to accommodate to that approach, as long as the math shows real revenue improvements.  High on the list of "loopholes" to close is home mortgage interest deductions."

Among the proposals on how to change this huge "cost" to the government would be:
    ● Only eliminate this deduction for taxpayers in the $250,000 or higher income
       bracket
    ● Maximize the total amount that can be deducted by anyone
    ● End the benefit on second homes and vacation property
    ● Maximize the total of all deductions on Schedule A
    ● Eliminate the deduction immediately
    ● Phase out the deduction like was done with all other interest during the Reagan
       era

In order to fully present the debate on which of these approaches might be best, Bill Rayman is providing multiple blog posts on his blog at http://blog.mortgagehelplosangeles.com/   You can reach Bill Rayman to discuss any mortgage needs at 12400 Wilshire Blvd Suite 900, Los Angeles, CA 90025 and by phone at 310-295-6213