Mortgage & Housing Deductions

Mortgage & Housing Deductions

Mortgage & Housing Deductions

Mortgage and housing deductions have always been the most criticized and denounced policy of all times if you consider the opinion of economists. The recent tax reforms proposed by the Trump administration have again brought this issue into the limelight. So, we will straight off get into the discussion and try to understand what it is and what it does.


In general deductions are those line items in your tax filing, which help you to reduce your tax liability. Individuals who own a house(s) can show the interest paid on their house mortgage as deductions and thus reduce the amount of taxes that they are supposed to pay. A lot of countries do not allow individuals to claim the interest on personal loans and thus mortgage interest deduction became more prominent. Though there are provisions of deductions, one must fulfill some criteria before being able to do so.


It is very important to itemize all the deductions that you want to be part of your tax filing process. Once it is done, you need to ensure that the itemized amount is more than the standard deductions, otherwise the benefits will not come into effect. The deduction is limited only to the interest paid on the mortgage and not the principal amount for the same. There is also a cap on the amount of money used as debt for the house.

The interest paid on the debt of the first million or $500,000 if you are filing separately is considered for the program. When it comes to home equity debt, the IRS considers only the first $100,000.

In order to invite or make it easier for more and more people to purchase houses, the tax code was reformed. Earlier, the tax code would allow interest paid for a personal loan to be exempted or called in as deductions, credit card debt also qualified for the same. It was later modified to remove personal loans and add interest incurred on home loans to be added as deductions. Given the time at which the modifications were done, the idea of having more people purchase houses just doesn’t fit. Simply because, back in 1913 people preferred buying houses with money up front than taking loans.

Changes to the tax code

The current government recently has proposed changes to the tax code when it comes to interest for mortgage and housing deductions. And a lot of experts in the real estate sector strongly believe that any modifications to the real estate sectors in that regards will shake things up. Many believe that the sector hasn’t completely recovered from the bubble that burst back in the year 2006. There have been several studies which suggest that allowing deduction of mortgage has not resulted in a direct increment in ownership of houses. In fact, it has resulted in an increase of property prices to a much larger extent, which again the real estate sector benefits from.

The availability of the tax cuts ensures that house buyers pay the effectively lesser price for their houses than what they had anticipated. This results in them willing to borrow an even higher amount for their houses for completion and addition of other things. This is the point where the loop begins and price associated with the house increase and so does the income opportunities of people that are involved with the business. Expensive houses do not necessarily highlight an economic growth in any form, as the spending is merely relocated. Thus, any changes to the tax code in relation to mortgage and housing deductions is sensitive, to say the least and must be dealt with a lot of care and intense thoughts.

Progressive Taxation – Thought Process It’s Pros, Cons

Progressive Taxation – Thought Process It’s Pros, Cons

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Progressive Taxation – Thought Process It’s Pros, Cons

Progressive Taxation A progressive taxation system is one where the tax slab increases considerably as the income increases. Thus, high-income individuals end up paying more taxes than what normal individuals would do. For that matter, the United State of America has a progressive taxation mechanism in place for its citizens. As an example, in the year 2016 individuals whose taxable income was below $9275 they ended up paying only 10% as taxes. On other hand, individuals whose taxable income was above $415,050 they ended up paying up to 39.6% as taxes.

Thought Process

There are two primary schools of thoughts when it comes to progressive taxation.
The first says, that the high-income individuals can bear the burden of more taxes.
However, the other school of thought says that this system kind of punishes the higher individuals who earn a lot. And in turn, also removes some motivation for people who want to earn more.


The first advantage of this system is that it lets people with lower income save more money from taxes so that they can spend or save.
As compared to flat taxation system or even regressive taxation system, a progressive taxation has the ability to extract more taxes.
As the income slab of individuals increase so does their tax liability. Individuals with access to greater amount of funds have the ability to improve the standards of services available for everyone.


The flip side to progressive taxation is its capability of being discriminatory towards the high earning individuals. A lot of people think this is a way of bringing down the income gap, as the taxes collected are used for social welfare programs. But reports suggest otherwise as social welfare programs gather up only a small portion of what the government spends usually.

Progressive Tax Vs Flat Tax

Flat taxation mechanism is on the other end of the spectrum when compared with progressive taxation. As the name suggests, the tax amount remains the same for everyone, regardless of how much they earn. An example of it would be income tax of 10%. It would remain the same despite the fact if you have low income or high income. As the tax is flat, it is same for everyone. Few countries have such a mechanism in place.
When you consider income tax for individuals under a certain slab, the taxation becomes a flat tax. All the individuals with income lower than the prescribed levels would end up paying the pre-fix flat tax.

Progressive Tax Vs. Regressive Tax

A Regressive tax is the opposite of progressive tax when it comes to the implementation. In this mechanism, individuals with lower income levels end up paying more taxes as compared to people who earn much more. If you consider goods or services, the charges levied on the same (sales tax) is lower for higher income individuals and higher for lower income individuals. Sales tax of the same amount on a particular good or service would comprise of higher percentage when you consider someone with lower income and compare it with high income individuals. The current taxation system followed in the US is progressive by nature. The system aims at charging individuals with low income, lesser taxes. Individuals with medium level income end up paying medium level taxes and high earning individuals pay a higher amount of taxes. It primarily follows a tax rate system that is incremental. The debate of it being fair or unfair for the wealthy is an ongoing process and there doesn’t seem to be an end to it. But by large and far this taxation system, according to several critics is the most reasonable system available to us. [/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
Early Withdrawal Penalties

Early Withdrawal Penalties

Early Withdrawal Penalties

Withdrawal Penalties.The whole idea of retirement planning is to ensure that you have enough money at your disposal during the non-working phase of your life. This is one of the primary reasons there are penalties if you go for early withdrawal in such schemes. The government provides several tax breaks for retirement plans and also penalties if you wish to withdraw from those earlier than anticipated. These penalties are in place to discourage you from using these funds for anything else apart from retirement. Essentially, if you withdraw any amount from your retirement fund accounts before the age of 59 and half years, you pay a penalty of 10%. This is on the top of the income tax that you must pay on the amount you just withdrew. Thus, you need to access the situation very carefully before going ahead with the decision to disturb your retirement funds.

Can you avoid the penalty?

The following are some of the most common methods that you can follow to skip the penalty.

  • Maturity age

All the retirement funds have a maturity age of 59 ½ years. If you withdraw any money from your funds post this age, the 10% penalty does not apply to you. However, you will still have to pay income tax on each withdrawal.

  • Medical Expenditure

If you have undergone any medical procedures or treatment and the amount exceeds 10% of your annual income, you can use your IRA contributions to pay for the same. The only two check points being, the medical expenses should be in the same year and you should not already have reimbursed it.

  • Purchase of Home

You can use up to $10000 (or $20000 valid only for couples) from your IRA contribution to pay for your first home without inviting any sort of penalty. IRA will pursue a background check to ensure neither you nor your spouse owns a home within the two-year period which leads to the sale of a house. If due to some reason the plan falls apart, you must deposit the amount back in 120 days to avoid penalty.

  • Disability

In the unfortunate event of you becoming disabled before the maturity age for retirement funds and cannot take part in any activity which will act as source of income, you can opt for a penalty free withdrawal from your retirement fund. The IRA entertains only genuine cases, as it sends in a physician to confirm the same.

  • College Expenses

There is yet another way in which you can skip the penalty of withdrawing the fund prior to the prescribed age. If you, your spouse, children or grandchildren want to pursue higher education, and you decide to pay the same from your IRA contributions, it will not fetch any penalties. IRA considers usual expenditure such as tuition fees, supplies, books etc.

  • Health Insurance

In the unfortunate event of you being unemployed for a certain duration of time, you can use your IRA contributions to pay for medical insurance to avoid them from getting lapsed. You can pay for the medical insurance for yourself, your spouse and any dependents. In order to qualify for the same, you should have received compensation for unemployment for a period of 12 weeks consecutively.

  • Passing it on

You can pass on the retirement funds to an heir if you lose your life before the age of 59 ½ years. This will not attract any penalty unless the heir is your spouse. In that case, they are again subject to the 10% early withdrawal penalty.

There are sure some ways of getting around the 10% penalty. But that should be your last resort and not the first line of defense. You should only consider IRA or any retirement fund for that matter in situations where there are no other ways out.