Congressional tax advisers are proposing a simplified deduction for interest that would mean a smaller write-off on many home mortgages.
On the other hand, the recommendation by the staff of the Joint Committee on Taxation could result in restoration of at least part of the consumer-interest deduction, which will expire at year's end.A simplified interest deduction was the most significant provision in a package of proposals by the joint committee for removing some of the complexity from federal tax law.
The House Ways and Means Committee, which has launched a new simplification effort, released the proposals Tuesday, along with some from the Treasury Department and others from the Ways and Means staff.
"At the least, we will have hearings on the proposals in the fall," said a Ways and Means aide, who spoke on condition of anonymity. Those hearings will help determine whether the committee will try to write a simplification bill.
Members of Congress don't like to tamper with the deduction for home mortgage interest, which generally is considered as close to a sacred cow as can be found in the tax law. About 25 million taxpayers claim the deduction, which will cost the treasury about $30 billion in forgone taxes this year.
The staff of the Joint Committee on Taxation concluded that present law, with its different rules for mortgages, investment interest and consumer interest, is too complicated.
The staff suggested three ways to simplify the law, two of which would water down the mortgage deduction.
The law allows a full deduction of interest on a loan of up to $1 million used to acquire a principal or second home and on home-equity loans of up to $100,000. Investment interest is generally deductible up to the limit of income earned on investments. After this year, no consumer interest, including automobile loans and credit cards, can be deducted.
The tax committee staff proposed these alternatives for writing off interest:
- Combine all non-business interest, including that for mortgages, consumer debt and investment borrowing, and deduct a set percentage of the total, perhaps 75 percent.
- Deduct interest equal to net income on investments, plus some additional dollar amount.
- Retain the current law for mortgage interest and allow a separate write-off for other interest, limited to net investment income. The portion of other interest that could not be deducted in the first year because of the limitation could be carried over into future years.
The joint committee staff said any of the recommendations would minimize complexity of present law. In addition, the first option would remove the "incentive for individuals to structure loans as home-equity debt in order to avoid the present-law limit on the deductibility of personal interest," its report said.