THE BASIS POINT

Proposed Changes To Homeowner’s Tax Breaks

 

As the saying goes, “There are only two certainties in life: Death and Taxes.”

But recently, even that seems uncertain. The tax part anyway. As you may have heard or read in the news, there’s currently a tax reform plan floating around Washington, DC that proposes changes to homeowners’ tax benefits. To be clear, it’s not the death of tax breaks for homeowners. But the proposed changes are significant. And the key word is “proposed.”

Here’s a quick history on this topic. In January 2005, President George Bush created the President’s Advisory Panel on Federal Tax Reform. The nine-member panel of academics, former politicians and government officials was charged with simplifying the tax code. This panel met 12 times during the year, and on November 1, presented two tax proposals that would rewrite virtually every tax law for individuals and businesses.

The proposals are currently in the hands of Treasury Secretary John Snow. It’s up to him and his team to review, distill and make recommendations to the President.

Proposed Changes to Mortgage Tax Benefits
Both plans call for a limit on the home mortgage interest deduction. Currently, tax deductions are available to homeowners for interest on up to $1.1 million of mortgage debt. The proposals call for a single Home Credit equal to 15% of mortgage interest paid. The credit would be limited to mortgages based on average regional housing prices, which range from $227,000 to $412,000.

Needless to say, this plan would drastically reduce tax benefits for homeowners in higher-priced markets like the Bay Area. To compensate, the panel has suggested that existing homeowners would be “grandfathered in” to the old tax code. In the event such changes were implemented, this would provide some short-term relief. But reducing tax benefits in the future would clearly discourage property investment long-term.

When Could These Changes Take Place?
It’s very important to note that these changes are not a foregone conclusion. Upon receiving the panel’s findings, Treasury Secretary Snow publicly called them “bold recommendations.”

Translation: This will be debated in Washington, DC for many months, if not longer. Treasury Secretary Snow will be reporting back to the White House by the end of the year. As for this kind of sweeping tax reform making its way through Congress, it probably wouldn’t happen until later in 2006.

The reason is that 2006 is a big election year for Capitol Hill, and with 73 million homeowners nationwide, there aren’t a lot of Congressmen that would be willing to sell a reduction in homeowners tax benefits to their constituents. They’re not going to risk those votes. They can’t afford to.

What It Means For 2005 Tax Planning
So that means that you don’t have to do anything now to plan for this because it will not be an issue for 2005 taxes. But we did want to bring it up because it’s something that’s been in the news and will continue to be in the news. We will monitor the situation and keep you informed. For now, here’s a few end-of-the-year tax planning items that you may want to make a note of.

Pay 2006 Property Taxes Early: For some people that may have had a significant adjustment to income or need an extra tax break for any other reason, one way to get that break is by paying 2006 property taxes in 2005. You probably just paid the First Installment of your 2005-06 taxes, and if you needed more tax relief, you could also pay the Second Installment this month, and take the deduction for 2005.

Locate Key Loan Documents: If you bought or refinanced your house in 2005, make sure you know where your closing documents are before they get buried or filed away in the holiday rush. The most important form you will need is your Department of Housing and Urban Development final settlement statement form. This has critical information that you or your tax preparer will need to ensure you’re getting all the tax benefits you’re entitled to.

Pay Deferred Interest Before 2006: If you have an Option ARM that has deferred interest (or “negative amortization”) that accrued during the year, you can also pay this off during 2005 and take the deduction this year. If you’d like to do this, and have already sent your December payment, you can just call the number on your statement and arrange payment over the phone.

 

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