Mortgage Interest Deduction on the Slicing Block

Obama's budget proposal includes changes to a key tax incentive.

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In order to pay for health care reform, President Barack Obama is proposing to take the axe--or at least the scalpel--to a longtime sacred cow: the mortgage interest deduction. The plan, which was included as part of the president's budget proposal for 2010--unveiled Thursday---would reduce the value of the mortgage interest and other deductions for the nation's highest earners. Taken together, the increases are expected to bring in $318 billion over 10 years.

Here's how The Wall Street Journal described the proposal:

Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments…

For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.

The proposal sets off what is sure to be a heated battle with housing-related industries. The National Association of Home Builders, for example, has already released a statement attacking the plan:

“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," Joe Robson, chairman of the National Association of Home Builders, said in a press release. "This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values and work against the President’s efforts to stabilize housing and turn this economy around."

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