Debt Reduction: Repealing the Home Mortgage Interest Deduction, State and Local, Health Insurance and Retirement Tax Breaks

To get a picture of the problem that lawmakers face, let’s look at a tale of two attitudes. Polls indicate that we as a nation are getting worried about the amount of debt we’re incurring as we prop up the American economy. TARP, Quantitative Easing, and corporate bailouts cost the country money and Americans are worried that much like Ireland or Greece, America could someday be bankrupt.

On the other hand, the economy has taken its toll on many of us and the idea of higher taxes or removing hard earned entitlements isn’t something we support either. Removing some of the most popular taxes could produce another $1.8 trillion in revenue over the next five years but how do you sell that to middle-class Americans, already hurting?

In all, there are about 200 tax cuts that are in danger of being repealed as part of America’s debt reduction plan and many of these are the popular tax breaks with the general public. Let’s take a look at a few that may be repealed as early as 2013 once the final phase of the bush tax cuts extension expires and perhaps a new Republican president in the oval office.

Mortgage interest tax deduction

If you own a home, you know about the mortgage interest tax deduction. In fact, this has been one of the biggest financial advantages of home ownership touted by every realtor, mortgage broker, and government report. These breaks can add up to a sizable amount of money for the homeowner but only if they itemize deductions. It is estimated that the mortgage tax deduction would save the government about $500 billion a year if repealed. On the flip side, the average tax paying home owner would lose up to $12,000 a year if this deduction was removed.

Tax-free income workers get from employers to pay for health insurance

Whether you know it or not, if you pay for employee sponsored health care coverage, you are most likely using pretax dollars to pay your portion of the premium. This works by deducting the money you are paying for your premium before taxes are imposed on your income. This represents an approximate 20% to 30% savings on your health premuims which, added up over time, is a substantial sum.

Deduction for state and local taxes

If you itemize your deductions, you may deduct any money paid for state and local income, sales, property, and other taxes. Nearly all of the 46 million households who itemized in 2009 claimed this deduction. (You can deduct state and local income tax or state and local sales tax but not both)

Deduction for charitable contributions

At the end of the calendar year, charities become much busier. Goodwill has cars lined up to donate goods, other charities see an increase in monetary donations, and any other way that Americans can find to give, they will. This is because they know that a portion of these contributions can be written off on their taxes if they itemize. It is likely that if the tax breaks for charitable donations are repealed, contributions will be smaller and the poorest Americans will get even poorer.

Tax breaks for retirement savings

Pretax dollars can be used for contributions to qualified retirement plans. Americans often use this as a way to shelter their income from taxes in the short term. However with rising taxes, an aging work force and a strained social security system  more monies are going into individual retirement accounts. To get some of this money, while still providing an incentive to save, the government may impose some sort of tax on funds going into retirement accounts rather than just when you withdraw them after retirement.

Are They Expenses?

Many lawmakers and tax policy experts argue that although these tax breaks are spun as savings, they are only savings to the individual citizen. In a broader economic sense, they are government expenses. By not taking in the income from these eligible tax payers, which total about $1 trillion annually, the government is actually incurring the expense paying for goods and services that aren’t otherwise covered with the $1 trillion (which is about one third of the current federal budget). They argue that the government balance sheet would be in drastically better shape than it is now and what it is projected to be in the future.

Lawmakers would commit political suicide if they were to try to repeal all of the popular tax breaks so that is not their intent. They want to phase out some of these breaks for the most wealthy (those in the millionaires club)

Currently, the tax system is regressive, giving the highest earning Americans the most breaks. Some politicians would like to make it work in reverse, giving lower earning Americans the bigger savings. Some wealthy individuals argue that they get the most breaks because they pay the most in taxes. In contrast, a small group of millionaires have formed an interest group who is lobbying for the tax cuts for the wealthy to be repealed. Their argument is that although it hurts them personally, the country needs it right now.

Whether or not anything changes in the tax code remains to be seen but for 2011 tax year, it’s probably safe to say that while many have the greatest of intentions, we can count on more of the same from our lawmakers: Gridlock.

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1 thought on “Debt Reduction: Repealing the Home Mortgage Interest Deduction, State and Local, Health Insurance and Retirement Tax Breaks”

  1. Gridlock is correct.
    That is unless our gov’t politicians are too busy lining their own pockets to worry about the U.S. taxpayers.


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