In our Flashcard series, The Atlantic aims to decode the concepts and terms readers encounter every day but seldom see explained. Today's installment: the plan by the chairmen of the deficit commission to change the mortgage interest deduction.
The chairmen of the president's deficit commission skewered a number of sacred cows in their widely discussed, and widely criticized, report. But few ideas have received more outrage than the plan to limit the mortgage interest deduction -- the costliest tax giveaway in the United States. What is the mortgage interest deduction and why should we want to reduce it?
Here's the rule: Every year, most homeowners are still paying interest on their house. But the IRS helps them out by letting them keep an amount equal to their mortgage interest multiplied by their tax rate. This amount is "deducted" or subtracted from their taxable income, reducing their tax bill.
With this benefit in 2012, the federal government will give homeowners more than $130 billion -- more than two and a half times the entire Department of Housing and Urban Development.*
Who benefits? Homeowners benefit because they get a subsidy, and renters don't. Rich folks who choose to itemize their deductions benefit, and lower-income families who take the standard deduction don't. Americans living in high-income, high-home value areas like Maryland and California benefit, while only one in seven North Dakotans take the deduction. High-income earners are in higher tax brackets and can deduct a higher portion of their interest. Most importantly, people who take out bigger loans benefit from having more interest to deduct.