Looks like the mortgage industry is in for another shake-up following future Treasury main man Steven Mnuchin’s unveiling of President-elect Trump’s plan to “cap mortgage interest, but allow some deductibility.” After the mortgage interest hike comes the mortgage interest deduction, which is an important incentive for buying a home.
Largest Tax Change Since Reagan
Mr. Mnuchin who will join Trump’s cabinet as Treasury Secretary said their top priority is to sustain economic growth, aiming for a 3% to 4% GDP. And to realize that goal, said Mr. Mnuchin, is tax reform.
“This will be the largest tax change since Reagan,” Mr. Mnuchin was quoted as saying in an interview with CNBC’s Squawk Box on the day he was nominated for the post.
At the heart of Trump’s tax reform agenda are these aspects that could spell bad news for the housing industry and the like.
Reduced Tax Brackets
According to Mr. Mnuchin, the new administration will reduce the number of IRS tax brackets from the current seven to three. Under the new tax bracket scheme, 33% will be the highest tax deduction.
Some analysts noted that this plan will only benefit the wealthy. In response, Mr. Mnuchin insisted that the tax cut will be offset by offering less deduction for the top earners.
Increased Standard Tax Deduction
The Trump Government will raise the standard tax deduction. For single filers, the standard tax deduction could go up to $15,000, from the current $6,300. For married couples who jointly file their tax returns, they could see a standard deduction of up $30,000, from the usual $12,600.
This could lessen the number of taxpayers who’d go for itemized deductions, which is required when applying for a mortgage interest deduction (MID).
Capped Itemized Tax Deductions
More importantly, the Government will put caps on itemized deductions, specifically the mortgage interest deduction.
A higher ceiling for standard deduction and capping the MID could affect consumers’ behavior towards buying a home and home prices as well.
MID is an incentive to homebuyers, entitling them to a tax deduction based on the amount they’ve paid on the interest portion of their mortgage debt. The mortgage must be used to buy a main home, second home, line of credit, and home equity loan.
Under prevailing tax rules, the homeowner can deduct his/her mortgage interest under the itemized tax deductions method. As to how much can be deducted as a home mortgage interest would depend on when the mortgage was taken out, how much is the mortgage debt, and how were the proceeds from the mortgage used.
The End of the MID Era?
While the mortgage interest deduction does not have a direct role in the homebuying market, it serves as an enticement, an incentive to encourage consumers to buy homes instead of renting out.
It’s often named as an important driver of the U.S. housing market, and any plans to eliminate the MID could mean a political disaster, Business Insider pointed out.
First-time homebuyers, especially, could use the MID to lower the cost associated with the interest portion of their mortgage debt after tax, read the statement of Michael Fratantoni, who serves as chief economist for the Mortgage Bankers Association, to Business Insider.
Under the contemplated changes, if you’re a homeowner with a mortgage debt, it would make more sense to apply for a standard tax deduction because:
- the tax break would be higher compared with the MID, which will be limited; and
- the paperwork is lesser than pursuing an item-per-item deduction.
With more benefits to gain from a simplified tax filing process, there’s not much difference between home buying and renting. As there would be lesser demand for homes, home prices would also drop and thus less money required to buy a house.
Against this backdrop, it’s understandable why mortgage industry groups are on the lookout for future developments on this matter. You too should be on the know for any changes that could affect your homeownership.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
