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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (44658)	11/2/2005 11:47:00 AM
From: ild	Read Replies (1) \| Respond to of 110194

<<<The 15% credit limits deduction to $3,705.>>> I'm confused by terminology. You used word "deduction" which to me is deduction against income. As I understand it's going to be a "credit" which is directly subtracted from tax owed.

To: Ramsey Su who wrote (44658)	11/2/2005 12:59:17 PM
From: benwood	Read Replies (2) \| Respond to of 110194

The 15% credit can actually be BETTER than the deduction. A deduction only helps once you pass the standard deductions and therefore qualify for itemizing. Unless your other deductions (excl. mortgage interest) are enough to allow you to itemize, your effective tax credit from mortgage interest is lower than your marginal tax rate because some of your mortgage interest simply gets you "even" with the standard deductions. This naturally is contrary to what most people think. For example, when my mortgage interest deduction drops another 1/3 or so, I will no longer be able to itemize at all. That means my credit against tax caused by mortgage interest will be 0.0%, nada, nothing, zippo. However, if a 15% tax credit were substituted, I'd suddenly be getting a tax break again! The net effect of such a replacement is to allow cheaper homes (smaller mortgages) to continue getting a tax break because you wouldn't have to itemize; mortgages about 250k would, on average, end up with about the same net tax burden; mortgages > 500k (my estimate) would end up with somewhat less net tax break; mortgages > 1 million would end up with only 1/2 or so as much tax relief caused solely by the mortgage interest. If you had multiple expensive homes, you almost certainly would see your total tax credits drop by half. SO, I like the idea -- it shifts the overall tax relief down the income ladder a bit. I think the deduction has only served to raise house prices anyway, and I would like the idea even more if the overall tax break caused by mortgages was reduced (or even eliminated eventually).