Author Daniel Defoe has been accredited with coining the original variation of the statement "nothing is certain but death and taxes." To help ease the blow of the latter, the Internal Revenue Service (IRS) has many legal deductions on taxes paid by citizens and interest paid on mortgages is just one of them.
Home mortgage interest deductions provides taxpayers who are also homeowners a way to legally reduce taxable income in regards to paid interest on a home loan. Currently the deduction can be claimed on principal residences and in some cases a second home. Combined with the advent of Fannie Mae and Freddie Mac and the creation of 30-year fixed rate mortgages, tax breaks for homeowners have helped make homeownership part of the American Dream.
History of Home Mortgage Interest Deduction
When the Government first approved home mortgage interest deduction, it was not done so to spur homeownership as part of the middle-class value system but to provide a break to the financial big wigs who did not need the savings in the first place. According to the New York Times, the history of the home mortgage interest deduction follows this time line:
- 1894: The first contemporary federal income tax was created and at that time all interest was tax deductible. The Supreme Court cited that the tax was unconstitutional and the process was ceased.
- 1913: The Constitution was amended to allow taxes, and a new income tax law was created, allowing interest to be deductible. At this point, the laws were primarily created for business or farm owners, as at this time, they were the ones most likely to have to pay interest in the first place.
- 1920s: Home mortgages outnumbered farm mortgages for the first time in the nation's history.
- 1930s: Creation of Federal Housing Administration (and mortgage insurance) and Fannie Mae (that allowed banks to get back in the business of lending) help lay the foundation for traditional homeownership.
- 1950s: Marks the time period that the bulk of homeowners relied on mortgages to buy the roof overhead.
- 1960: With the turn of this decade, 62 percent of Americans owned, not rented, their living accommodations and enjoyed the interest deduction associated with homeownership
- 1970s: Credit cards grew in popularity and the interest deducted on those debts created a loophole in the interest deduction process.
- 1986: After many years of debate, 1986, Congress terminated the benefits of interest deductions for credit-card debt and other consumer loans. The mortgage deduction was left intact and operates as is today.
Future of Home Mortgage Interest Deduction
When Congress originally modified the interest deductions, a cap was put into place. Currently taxpayers can legally deduct the interest on mortgages worth up to a total of $1 million on either primary residents or second homes. Additionally consumers can deduct up to $100,000 on a home-equity loan. Presently, the administration of President Barack Obama is reevaluating the laws and considering revisions to the policy.
Recently, the National Commission on Fiscal Responsibility and Reform, proposed new limits surrounding mortgage interest rate deductions. Early this year the current administration created a bipartisan commission to investigate options for revamping the tax system in order to reduce the national deficit. Potential changes that may affect the status quo include options that would exclude second home tax breaks, eliminate deductions on home equity loans or not applying the deduction to jumbo mortgages over $500,000. At this point, no revisions to the current policy have been made.
How to Claim Mortgage Interest Deductions
Individuals interested in claiming their fair share of the tax deduction can only do so on qualified mortgage interest amounts, home equity lines of credit, and construction loans for primary or secondary residencies. To legally do so consumers must:
- File form 1040 and itemize deductions on Schedule A
- Only individuals (or joint-filers) who are legally obligated to the loan and who have intention of repaying the debt can apply for the deduction.
- Only qualified homes purchased with a secured loan can claim the interest deduction.
The following documentation will be required to stake your claim:
