Question

The largest tax break for most Americans is the mortgage interest tax deduction, which allows home owners to deduct from their taxable income the amount of money they pay in interest to finance their homes. The tax break is intended to encourage home ownership. Compare that tax deduction to replacing it with a 20 % tax credit for interest paid for home ownership on both equity and efficiency grounds, Use the current tax laws and make the comparison to replacing the deduction with the credit.

Answer 1

Mortgage Interest Deduction is one of the most loved Tax Break for Americans. But in reality facts are different. Like in order to take this, homeowners must itemize their deductions while determining their income tax liability. That provides an opportunity to account for specific expenses, including others like property taxes and Mortgage interest. And Since Mortgage Interest is the highest, they take this one. And Taxpayers who do not make it more than standard deduction ends up with not taking it.

It is Preferable to take tax Credits than tax deductions, as tax credits simply reduce the Tax Due rather than taxable income.The effect of Mortgage Interest Deduction depends upon the Marginal tax Bracket. Also Taxpayers who does not take their benefit as lower than standard deduction. They will be able to take it as the form of Credit. But still it depends upon how much tax credit is allowed .For example,

Particulars	Tax Deduction	20% as tax credit
AGI	$10000	$10000
Less: Tax Break	($2000)	-
Taxable Income	$8000	$10000
Tax Rate	25%	25%
Tax	$2000	$2500
Less Tax Credit 20%	-	($400)
Tax Payable	$2000	$2100

Here, We have seen that 20% Interest as Credit rather than deduction increases the tax liability by $100. Therefore it is not preferable. Had the credit been more than 25% then the situation will be different.