Revenues
Convert the Mortgage Interest Deduction to a 15 Percent Tax Credit
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Revenues | * | 1 | 2 | 3 | 4 | 10 | 21 | 23 | 24 | 26 | 9 | 113 |
Source: Staff of the Joint Committee on Taxation.
Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections. The estimates include the effects on outlays resulting from changes in refundable tax credits.
* = between zero and $500 million.
Homeowners can deduct mortgage interest and property taxes from their income if they itemize deductions. Under current law, the tax code limits the amount of mortgage debt that can be included in calculating the interest deduction to $1.1 million: $1 million for debt that a homeowner incurs to buy, build, or improve a first or second home; and $100,000 for other debt (such as a home-equity loan) for which the owner uses the personal residence as security, regardless of the purpose of that loan.
This option would gradually convert the tax deduction for mortgage interest to a 15 percent nonrefundable tax credit. The option would be phased in over six years, beginning in 2015. (All years referred to in this option are calendar years.) From 2015 through 2019, the deduction would still be available, but the maximum amount of the mortgage deduction would be reduced by $100,000 each year—to $1 million in 2015, $900,000 in 2016, and so on, until it reached $600,000 in 2019. In 2020 and later years, the deduction would be replaced by a 15 percent credit, the maximum amount of mortgage debt that could be included in the credit calculation would be $500,000, and the credit could be applied only to interest on debt incurred to buy, build, or improve a first home. (Other types of loans, such as those incurred to buy second homes and those using homes as security, would be excluded.) Because the credit would be nonrefundable, people with no income tax liability before the credit was taken into account would not receive any credit, and people whose precredit income tax liability was less than the full amount of the credit would receive only the portion of the credit that offsets the amount of taxes they otherwise would owe. The maximum amount that could be included in the credit calculation would not be adjusted for inflation after 2020.