President Bush: Mortgage Deduction Will Remain Part of Tax Code

In November, a tax reform panel appointed by President Bush submitted a report that recommended putting limits on the mortgage interest tax break in a couple of ways.

Answering a question from a home builder during a question-and-answer forum in Florida, however, the president said: “I don’t think you have to worry about the mortgage deduction not being a part of the income-tax law.”

The panel’s proposal including the following:

1. Lowering the mortgage-interest cap, which is the amount of a home loan on which owners would receive a tax break for interest paid. The panel suggested lowering the cap from $1 million to the average regional home price, in the range of $227,000 to $412,000.
2. Converting the mortgage interest deduction to a tax credit equal to 15 percent of interest paid on mortgages up to the cap.

A credit is a dollar-for-dollar reduction of the taxes you owe, while a deduction only reduces your taxable income by a percentage equal to your top tax rate. For example, a $100 credit reduces your taxes by $100, but a $100 deduction reduces your taxes by $25 if you’re in the 25 percent bracket.

Deductions benefit high-income taxpayers the most and are limited to those taxpayers who itemize on their federal tax returns. A credit would be available to all homeowners.

If the panel’s mortgage proposals were ever adopted, the bigger your Florida home loan and the higher your tax bracket, the more likely it is that you’d see less of a tax break than you would under the current system.

Some Republicans have said some of the recommendations from the panel, such as the one on mortgage interest, might generate too much controversy, especially in the current Congressional election year.

Referring to concerns the builder had raised about interest rates, Bush said, “You’ll be happy to hear I don’t set interest rates.”

That job, of course, falls to new Federal Reserve Chairman Ben Bernanke. He has already hinted that raising mortgage rates may be necessary.