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Congress may end mortgage tax break ; Many now question value of deduction

Fifteen years ago, Carol Nietmann and her husband bought a spacious house in Maryland near Chesapeake Bay. And thanks to the time-honored tax deduction for mortgage interest, she said, their new place was a little bigger and a little nicer than they would otherwise have thought they could afford.

Much the same has been true for millions of Americans up and down the income scale. Perhaps the most sacred of all the sacred cows in the tax code, the home mortgage deduction has long been seen as crucial to a major element of the American dream -- owning your own home.

It has also been a boon to home builders, construction workers, the financial services industry and local governments that benefited from fatter real estate tax revenue.

But nearly a century after taking effect, the mortgage deduction may face a day of reckoning. Although out of the spotlight while the lame-duck Congress thrashed to an end, the mortgage deduction issue is likely to resurface next year when the new Congress -- including a lot more deficit-hawk Republicans -- takes over.

In part, the hoary deduction has a target on its back as a result of policymakers rethinking the whole issue of homeownership. The havoc that followed the latest housing bust has raised questions on whether near-universal homeownership should be a paramount goal.

More important, despite the deduction's grip on the public and politicians, changing it as part of a package of other revisions offers Washington a chance to do something meaningful about the surging federal deficit: generate billions of dollars more in federal revenues that could be used to cut the deficit while inflicting surprisingly little pain on most middle-class homeowners.

About half of all homeowners in the U.S. -- and just a quarter of all taxpayers -- benefit from the mortgage interest deduction, because most people don't have home loans or don't pay enough in mortgage interest to take advantage of the benefit.

Last year, couples filing joint federal returns needed mortgage interest and other deductions exceeding $11,400 to make it worthwhile to file itemized tax returns and take advantage of this tax preference.

The deficit commission's plan would do away with itemized deductions altogether and allow every homeowner to get a tax credit equal to 12 percent of interest paid on mortgages up to $500,000.

The average nationwide mortgage loan as of October was $215,000, according to the Federal Housing Financing Agency.

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