The draft tax bill unveiled on Thursday holds a lot of goodies for rich Americans. Featured breaks include repeal of the estate tax and alternative minimum tax, along with reductions in rates on corporate and pass-through business income. The bill’s treatment of tax breaks for homeowners is an exception, however. Up to now, the mortgage interest deduction, which is the biggest single tax benefit for homeowners, has tilted strongly toward households in the highest income brackets (see chart). That will change if the tax proposal becomes law.


Three parts of the proposal will impact homeowners:

  • The maximum mortgage for which the interest deduction will be allowed will fall from $1,000,000 to $500,000 for newly purchased homes.
  • Deductibility of property taxes will be capped at $10,000 per year.
  • The standard deduction will be doubled. For most middle-class families, the benefit of the larger standard deduction will far outweigh the savings from the mortgage deduction.

As a result of these changes, very few middle-class families (those with incomes from $40,000 to $125,000 per year) will find it worthwhile to itemize. They will lose the average of $193 per year they now get from the mortgage deduction, but the higher standard deduction should, on average, make up for that. (If it does not, they can continue to itemize.) What is more, without the hassle of itemizing, more families will be able to file their own taxes.

High-income households, on the other hand, will see an erosion of their benefits, since they are presumably the ones who own most of the homes with mortgages greater than $500,000.

As I explained in an earlier post, outright repeal of the mortgage deduction would have been best, but the changes in the draft tax bill are a step in the right direction.