How the changes in the mortgage interest deduction might work – an example:

Assume in 2008, the principal balance on a mortgage is $300,000 and interest rate is 6%.  The amount of mortgage interest paid in 2008 is likely to be $18,000.  That amount would be claimed on the tax return as a deduction. 

The value to the homeowner/taxpayer of the deduction is determined by multiplying their tax rate by the deduction amount.  If it is assumed the taxpayer is in the 25% marginal tax bracket, then the value of the mortgage interest deduction is $4,500 (the deduction amount of $18,000 multiplied by the tax rate of 0.25).

This bill would propose that as the square footage of the home rises above 3,000 square feet, the portion of the mortgage deduction that the owner can claim is reduced.  Holding the tax rate constant, the value of the deduction diminishes from $4,500 at 100% as shown in the example below:

• 85% deduction claim for homes 3000-3199 square feet ($18,000 x 0.25 x 0.85) = $3,825
• 70% deduction claim for homes 3200-3399 square feet ($18,000 x 0.25 x 0.70) = $3,150
• 55% deduction claim for homes 3400-3599 square feet ($18,000 x 0.25 x 0.55) = $2,475
• 40% deduction claim for homes 3600-3799 square feet ($18,000 x 0.25 x 0.40) = $1,800
• 25% deduction claim for homes 3800-3999 square feet ($18,000 x 0.25 x 0.25) = $1,125
• 10% deduction claim for homes 4000-4199 square feet ($18,000 x 0.25 x 0.10) = $450
• 0 deduction claim for homes 4200 square feet and larger ($18,000 x 0.25 x 0) = $0

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