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Replacing mortgage deduction may boost homeownership

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Replacing one of the most infamously ineffective tax deductions with a refundable credit would boost homeownership for lower and middle-income households, according to a new study.

The mortgage interest deduction of up to $750,000 per year of the debt incurred on a first or second home for itemizing taxpayers represents one of the many aspects of the Tax Cuts and Jobs Act that is subject to expiration at the end of next year. For many years, economists and other experts have questioned the high cost of roughly $30 billion a year in lost federal revenue and the benefits of an expenditure that so disproportionately flows to wealthy homeowners who can likely afford to buy a house without it. The Tax Cuts and Jobs Act pushed down the mortgage interest deduction from its earlier level of $1 million — which means that it’s one of the revenue-related provisions that will be crucial to the debate in 2025 about extending the law.

“The mortgage interest deduction is doing nothing to encourage homeownership right now,” said Carl Davis, the research director of the Institute on Taxation and Economic Policy, a nonprofit, nonpartisan tax policy organization focused on equity and sustainability in the system.

READ MORE: How taxes reflect and exacerbate racial wealth disparities 

“Most people can’t access the deduction,” Davis continued. “Those people who are fortunate enough to get more than a trivial amount of tax cut from this deduction generally already have enough income to become homeowners. Against that backdrop, almost anything would be more effective than the mortgage interest deduction at promoting homeownership. A refundable credit that people with moderate incomes can actually use is certainly one example of a policy that has a better shot than the current system at helping people achieve homeownership.”

Dropping the deduction altogether would generate enough revenue to pay for a 4.7% cut in income tax rates and reduce house prices by 1.66% with only a drop of 60 basis points in the overall rate of homeownership, according to the working research paper released in October and revised last month by Michael Keane of Johns Hopkins University’s Carey Business School and Xiangling Liu of the University of New South Wales in Australia. Switching out the deduction for a fully refundable credit of 24.6% of mortgage interest costs would carry the same revenue impact as the existing policy while leading a surge in homeownership, they concluded.

“Of the policies we analyze, only a refundable mortgage interest credit increases homeownership, especially for low- and middle-income households and young households. These may be important policy goals in themselves,” Keane and Liu wrote. “High income households receive disproportionate benefits from tax preferences in the baseline system, so a policy to rectify this may in fact be desirable.”

The refundable credit would tamp down some of the demand for the largest kinds of housing among the wealthiest households, which, in turn, would lead to a 1.3% drop in home prices. And the homeownership rate would jump 3.6 percentage points to 68.5%, with most of that expansion “concentrated among low- and middle-income households,” the authors said.

READ MORE: Trump and the GOP won a huge election for taxes. Now for the tricky part 

They calculated the impact by analyzing statistical models of changes in taxes between 1968 and 2019 with “life-cycle features” incorporating calculations of the differences in demand based on a buyer’s age and the presence of children, as well as other factors. The existing mortgage interest deduction has increased homeownership for lower and middle-income households, but it has done so “at a substantial cost in economic efficiency,” Keane and Liu wrote. 

“It leads to two distortions: (1) over consumption of owner-occupied housing and (2) over investment in owner-occupied housing relative to other assets,” they said in the paper. “Our simulations also show the mortgage interest deduction is a regressive policy, as most benefits flow to higher-income households who are induced to buy larger houses.”

With President Donald Trump taking office next month alongside Republican allies in control of both houses of Congress, ambitious tax cuts have emerged as one of the key policy areas for financial advisors, tax professionals and their clients to watch next year. 

Keane and Liu also examined the potential impact of taxing “imputed rent” — the estimate of how much a landlord might receive if a tenant lived in the space, after subtracting mortgage interest and other expenses. While that suggestion isn’t likely to garner much support in the current political environment, that policy could pay for a 9.15% cut in income tax rates and slash home prices by 71 basis points due to an accompanying shift toward renting over buying in the marketplace.

READ MORE: 5 tax strategies that pay off in real estate and homeownership

With lawmakers set to debate so many provisions of the Tax Cuts and Jobs Act and much of the tax code hanging in the balance of fraught negotiations and numbers, such research could prove helpful. Homeownership comprises a frequent policy goal, a feature of what is known as the American Dream and, through property taxes, another aspect of state and local duties subject to a different expiring limitation under the law. So next year’s debate could leave a big mark on tax rules focused on homeownership. 

It currently has “three important tax advantages,” according to Keane and Liu. “Home mortgage interest is tax deductible, the implicit rental income on owner-occupied housing is not taxed, and capital gains from owner-occupied home sales are largely untaxed.”

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IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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