Will Your Deductions Be Cut to Solve Deficit Woes?

October 11th, 2011

The Joint Select Committee on Deficit Reduction (JSC) is set to convene soon with the goal of reducing the deficit by $1.5 trillion. How will they come up with that amount? Some sources think they may consider fundamental tax changes that include cutbacks to itemized deductions for individuals.

Although both parties purport to be against increasing taxes for the middle class who already shoulder a significant portion of this nation’s tax burden, reducing itemized deductions is a tax increase by another name.

The health care law has already limited medical deductions by increasing the AGI limitation from 7.5% to 10% beginning in 2013.

Just a few years back, Congress tightened up the charitable contribution deduction by imposing strict verification rules. The economy has also taken a toll on charitable contributions, with more and more individuals taking the position that charity begins at home.

All that remains is the deductions for taxes, home mortgage interest, and miscellaneous deductions. Of those, the deduction for home mortgage interest makes up a substantial portion of the itemized deductions, thus making it the rumored target for reduction. We will have wait and see if either party wants to be seen as attacking the American dream of home ownership.

Of concern to any homeowner is what changes to the mortgage interest deduction will do to their tax picture. Many individuals were able to afford their homes based on the tax savings generated by the interest deduction. Without the deduction or with a reduced deduction, will they still be able to manage their mortgage payments? Could tinkering with mortgage interest deductions trigger another round of defaults and foreclosures? Congress needs to act carefully to avoid further impacting an already fragile housing market.

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