What if the United States got rid of or changed the home mortgage interest deduction in the next round of tax reform?
For decades, that deduction has been considered sacrosanct, but as we move closer to tax reform in an era of budget cuts, ideas have been percolating to change or eliminate it.
The legislation to lift the debt ceiling gives the country a framework for more than $2 trillion in budget cuts over 10 years and avoids default. But it also puts off discussion of taxes for another day — and it’s unlikely that we’ll see any movement on tax reform or significant tax changes until 2012.
“If I were at a roulette table in Vegas, I would put almost all my chips on a square marked ‘Lame Duck,’” says Clint Stretch, managing principal of tax policy in Deloitte Tax’s national office in Washington, D.C. “I see nothing that Congress will regard as a ‘must do’ in the tax area before a lame-duck session in 2012.”
On Wednesday, we looked at mortgage debt and the home mortgage interest deduction, based on new data released in a Joint Committee on Taxation report. Today, we’ll look at student loans and their corresponding interest deduction.
The numbers here are far, far smaller, and therefore less likely to be a meaningful target in the ongoing budget discussions in Washington: The amount of student loans out, $33 billion $330 billion, represents a sliver of total household debt of $13.4 trillion, and is dwarfed by the $10.2 trillion in home mortgage debt. While the ever-rising cost of higher education is an enormous issue for anyone who’s facing those college costs, as a country we’re more indebted for our cars.
Even if you realize how indebted to our homes we’ve become, the numbers in a new report from the Joint Committee on Taxation are mindboggling: Mortgage debt at the end of 2010 reached nearly $10.1 trillion, and accounted for 88.4 percent of total household income.
That’s down slightly from the peak, in 2007, of 101.1 percent of household income, but it’s “roughly 40 percent higher than 2000, 50 percent higher than 1990, and 230 percent percent higher than 1960,” according to the report.
The Internal Revenue Service’s Offers in Compromise program — in which taxpayers negotiate down the tax debts that they owe — has a long and tumultuous history. Critics have long complained about the complexity of the program, and the low rate of accepted offers, which amounted to just 24 percent between fiscal 1996 and 2005, according to the Treasury Inspector General for Tax Administration.
In testimony before the Senate on complexity and the tax gap, National Taxpayer Advocate Nina Olson showed that the result of trying to collect from delinquent taxpayers during the economic downturn was what you might expect — a long line of taxpayers waiting for resolution.
We talk a lot about tax rates here, and about whether they might go up in the future and for whom. But to think intelligently about tax policy — not to mention your own tax strategy — it pays to stop and ask: Which tax rate do you mean? And what tax rate matters most to you?
When most people talk about tax rates these days, what they’re really talking about are marginal tax rates. Your marginal tax rate is the percent you’ll pay on the last dollar of income you bring in. Today, those federal marginal tax rates range from 10 percent to 35 percent; under the terms of last year’s tax agreement, they’ll expire next year and the one thing you can count on is another big debate over what tax policy should look like.
Often, when people inherit stocks, funds or other financial assets, they’re loath to get rid of them. There’s an emotional attachment to the asset, as a last connection to the person, that goes beyond logic.
I know, the last thing you want to think about now is taxes. Taxes, taxes, taxes, it’s really tiresome. But the truth is that tax planning in advance can save you more than any last-minute maneuvers. And some people are already beginning to think ahead to the uncertainty of tax rates after 2012.
After all, the rules put in place by last year’s tax deal last for two years only, and if there’s one thing that’s clear it’s that there will be another battle over taxes soon.
If you’ve recently become an entrepreneur, consultant or self-employed person: Welcome to the world of quarterly taxes. While tax day stories typically focus on getting through last year’s filings, even harder, for the surging number of people affected, is figuring out what to pay for the first quarter, due at the same time.
Guess too low, and you’ll owe penalties. Guess too high, and you’ll have less cash to spend during the year. But guessing just right means estimating your income, and your business expenses, for the year. And that’s no easy task.
It’s the simplest things that can trip you up at tax time, like not getting money into your account or forgetting to sign your return. But this year, with so many tax changes, there are even more minefields.
If you were thinking you’d do your tax return the old-fashioned way, by hand, just stop now. Get an accountant or a tax-software program. Without software — which, yes, even accountants use — you’ll be unlikely to get through your return without errors.