By Tom Butala
Tax Day 2011 is right around the corner, with Federal income tax returns due by Monday, April 18. Homeowners enjoy a major tax break at this time, but due to the tumultuous housing industry it may not be available much longer.
The advantage of homeownership is what’s known as the mortgage interest deduction. The mortgage interest deduction is a longstanding Federal policy that allows the homeowner to deduct mortgage interest payments from their year-end taxable income.
“I always advise my clients that being able to itemize their deductions is not a bad thing,” says Managing Partner of Hallandale Beach, Fla.-based The Accounting & Tax Company, Dan Farmer. “Remember, if their tax rate is 25 percent, this means that the taxpayer reduces their taxes by $25 for every $100 spent on allowable deductions.” Other deductible items include property taxes, charitable contributions, health care costs or job expenses.
Farmer notes some guidelines to taking advantage of the mortgage interest deduction. For starters, the mortgage interest payments must be greater than $600, and must be reported to the Internal Revenue Service (IRS) on Form 1098. Banks are required to have extended this form to homeowners no later than Jan. 31. If the outstanding mortgage debt exceeds $1 million, however, the interest deduction is not applicable.
In addition to the tax break they see this month, the homeowner can seek financial gain by refinancing their home.
“Refinancing will lower your interest rate and your monthly payment,” says Erick Vargas, Realtor with Florida Realty of Miami. “If there’s any equity in the property then you can cash-out to pay off some other debts with higher interest rates.”
Farmer notes that, like a mortgage loan, the refinance plan also allows taxable deduction. “When the proceeds are used to buy, build, or substantially improve a first or second home and the new and any remaining loans do not exceed $1 million, the interest would be deductible,” he says.
According to ChicagoTribune.com, mortgage interest deduction costs the Federal government an estimated $100 billion in tax revenue a year. It’s for this reason that some groups propose to terminate the policy.
One such group, the California-based Green Lining Institute, suggests a yearly tax credit of up to $5,000 for low-to-middle income families purchasing moderate or low-priced homes.
“The fragile market cannot afford this right now,” says Chicago-based PHH Home Loans Senior Mortgage Banker Larry Steinway. “The segment that benefits from this (mortgage interest deduction) is the middle class. To take away this huge portion of spending would have a disastrous effect on the overall economy.”
The Charlotte Observer says the Fed’s proposed 2012 budget would keep the deduction in place, but would limit deductions for families who make over $250,000 annually.