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Mortgage deductions: Wealthy on the losing end

Proposal will increase taxes for high-income homeowners.

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By Les Christie, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The Obama administration hopes to tap the rich to help pay for its ambitious programs. Specifically, that would include slashing mortgage interest deductions for high-income taxpayers.

The proposal would cap at 28% the tax break for itemized deductions.

That would leave people in higher marginal tax brackets of 33% and 35% - the wealthiest Americans - with a smaller benefit from the deduction of mortgage interest, state and local taxes and other items such as charitable contributions.

The move is projected to raise $318 billion over 10 years and fits nicely with the president's campaign pledge to increase taxes only for families earning more than $250,000. Few, if any middle-income homeowners are in tax brackets of more than 28%.

Dean Baker, co-director of the Center for Economic and Policy Research, a D.C. think tank, said he was impressed with this part of the budget plan.

"It's a no-brainer for economists," he said. "Why have taxpayers been [in effect] subsidizing home payments for the highest income people in the country?"

The overwhelming majority of low and middle income people take the standardized deduction when they file their taxes [and] they receive no benefit at all from the mortgage interest deduction, said Patrick Fleenor, chief economist for the Tax Foundation.

"If you live in an inexpensive home or you're deep in your mortgage and paying little interest, you're better off taking the standard deduction," he said.

But homeowners in the highest marginal tax bracket, those earning more than $357,700 a year, get back 35 cents on their taxes for every dollar they spend on mortgage interest. Under the Obama plan, that benefit would be reduced by 20% to 28 cents on the dollar.

Broad impact

Housing industry sources were disheartened by the news, saying it would put downward pressure on home prices.

"The timing couldn't be worse," said Lawrence Yun, chief economist for the National Association of Realtors.

"With the housing market still reeling from its worst downturn since the Great Depression, this is not the time to talk about raising taxes on home buyers and home owners," said Joe Robson, president of the National Association of Homebuilders, in a statement.

The plan, which wouldn't start for another two years, is intended to focus solely on high-income Americans, but its impact would be much broader, say industry sources.

Yun said it would reduce the value of high-end homes by increasing ownership costs. Potential homebuyers calculate affordability as a total outlay of funds. If the tax deduction goes down, their ownership costs rise.

For example, someone in the 35% marginal rate bracket buying a million dollar home and putting 20% down would have an $800,000 mortgage. At 6% interest, they'd be paying interest of $48,000 a year, or $4,000 of their $4,797 a month mortgage payment.

Currently, 35% of that payment - $16,800 - is tax savings, but under the new plan, only $13,440 would be, a $3,360 difference.  To top of page

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