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Federal Panel Seeks to Change Mortgage Deduction
By Ross Kinney, Manager, Pinnacle Mortgage Group

A proposal by President Bush's tax-reform panel to convert the mortgage-interest deduction to a 15 percent tax credit is getting mixed reviews.

Currently, taxpayers who itemize can deduct interest paid during the year on a mortgage up to $1 million, and a home-equity loan worth up to $100,000.

If the panel's proposal is enacted, mortgages eligible for the tax break would be limited by a formula reflecting the average regional price of housing. Today, that range would be from $227,000 to $412,000 nationwide. Mortgages for second homes and interest paid on home-equity loans would be not eligible for the 15 percent credit. Keep in mind a deduction lowers your taxable income while a credit lowers the tax you must pay.

Under the current proposal, taxpayers who own homes would have five years before they had to use the new credit. During the transition period, homeowners could take a deduction, but the size of the mortgage eligible for a tax break gradually would fall. At the end of the five years, everyone would be using the proposed credit.

On the upside, some of the proposed changes, including the home credit, could benefit middle-class and low-income taxpayers. For example, the estimated 70 percent of taxpayers who don't itemize and take advantage of the mortgage interest deduction now would get a credit. Another benefit of the proposed reforms is that it could minimize or keep the alternative minimum tax from hitting millions more taxpayers next year. As it stands now, lawmakers must act each year to prevent that tax from hitting less wealthy taxpayers.

On the downside, the panel's recommendations could affect the values of homes, particularly at the high end. The National Association of Realtors estimates housing prices could decline 15 percent if the deduction is eliminated.

While the proposal is still being debated, it's worth knowing about as you make home buying or home investment decisions now.

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