"What Castle?" Dubya Asked

(You can consider this a follow up to both "Taking Care Of The Castle" and "A 'Gilded Age' For Some.")

Doesn't it figure? The ONE SECTOR of this economy with some actual, bona fide growth for non-millionaires (housing, loan refinancing and credit consolidation...and doesn't THAT tell you how peachy things are?) is one that is facing the axe from President Stupid Head's commission.

I know there's a lot of political "yak yak" all over the place, including here of course, but often, the news that really impacts us appears in the business section, such as this column from Jeff Brown that appeared in today's Philadelphia Inquirer.

This is definitely something we have to watch (and I'm not even going to ask how anyone thinks the alternative minimum tax bite can be lessened by messing around with the homeowner mortgage deduction - only Bushco could come up with something like this).

On Personal Finance Defending your home's deduction

By Jeff Brown
Inquirer Columnist

Note to Washington: Keep your grubby hands off our mortgage deductions!

Yesterday's papers carried accounts of an idea being considered by President Bush's tax-overhaul commission - to eliminate the vile alternative minimum tax by, among other things, trimming the break homeowners get on mortgage interest.

Currently, homeowners can deduct all the interest paid on mortgages of up to $1 million, often dramatically slashing their income tax.

Various news accounts said the commission may recommend dropping that ceiling to $300,000 or $350,000.

Since the median home price nationwide is about $220,000, most homeowners would see no change in the deduction.

But a $300,000 ceiling would hurt many homeowners in the higher-priced areas, such as the East and West Coasts.

Imagine you had a $400,000 mortgage and were only permitted to deduct interest paid on the first $300,000.

Annual interest payments on the remaining $100,000 would be about $7,200.

Losing the tax deduction on that would cost you about $1,800, assuming a 25 percent tax bracket.

Granted, many people with $400,000 homes could afford an $1,800 sting.

Curtail, then kill?

But would a cut in the interest deduction be the first step toward total elimination? Would loss of this deduction really be offset by savings on the AMT, which is affecting more and more middle-income taxpayers? Or would ordinary homeowners get the short end - paying for an AMT elimination that mainly benefited the rich?

It's too soon to know. But for many homeowners, the mortgage-interest deduction is the biggest tax-saver on the return.

It's sacred.

Still, I believe lots of homeowners overestimate this deduction's value and sometimes make unwise decisions as a result.

Many people buy more home than they can afford on the theory a big interest payment will save them a lot of taxes.

In fact, it doesn't make sense to pay another dollar in interest just to save 25 cents in tax.

Examples like the one above are fairly typical, but they don't tell the whole story. Take, for example, a married couple with $100,000 in annual taxable income, filing a joint return. The first $14,600 is taxed at only 10 percent, the next $44,800 at 15 percent, and the remaining $40,600 at 25 percent.

Although this couple is said to be in the "25 percent tax bracket," once the three rates are combined the federal tax bite actually is about 18 percent.

Calculate real tax rate

Also, this assumed $100,000 in taxable income, which is what's subject to tax after various deductions are made. Many couples with $100,000 in gross income - before the deductions are taken - actually pay only 15 percent in federal income tax, perhaps less. This is called the "effective rate."

Using this figure, the mortgage-interest deduction isn't quite as valuable as it first appears. For an accurate measure of the deduction, you have to do your return twice - with the deduction and without - to see what it's really saving you.

There's no doubt, however, the mortgage deduction does save homeowners something at tax time - in many cases thousands of dollars. It's not something to be given up lightly.

The President's bipartisan commission is to have final recommendations by Nov. 1. If they include a cut in mortgage-interest deductions, and if the President embraces the idea, there's going to be quite a battle.

Damn straight there will be a battle!

All right, boys and girls, repeat after me, OK?

WORST...
PRESIDENT...
EV...
ER!!!!