Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households, and would diminish or end the mortgage tax break for many of those taxpayers.
"This is definitely a chance worth jumping for," said Amir Sufi, a professor at the Booth School of Business at the University of Chicago. "For a fixed amount of revenue, it's better to remove deductions than increase marginal tax rates."
Such a move would be fiercely opposed by the real estate industry. The industry has played a crucial role in defending the tax break, even as other countries with high homeownership have phased it out.
Housing market players who oppose any whittling down of the mortgage deduction still have plenty of time to press their case before Congress makes a decision. If President Obama and Congress do manage to reach an agreement to avoid the looming tax raises and spending cuts, their deal will be broad in nature. Then, over the following months, Congress will hash out details, like any caps on deductions.
"Until Congress introduces specific legislation, there's nothing to say about any proposed changes to the mortgage interest deduction," Gary Thomas, president of the National Association of Realtors, said in an e-mailed statement. "However, it has always been the N.A.R.'s position that the mortgage interest deduction is vital to the stability of the American housing market and economy, and we will remain vigilant in opposing any future plan that modifies or excludes the deductibility of mortgage interest."
One of the reasons the mortgage tax break is so vulnerable is that both Democrats and Republicans have recently favored capping deductions, including both President Obama and the recent Republican presidential nominee, Mitt Romney.
What is more, deductions could be used to grease a compromise in the budget negotiations. High earners would be hit most by deduction limits, something that might make Republicans recoil. But the party may tolerate such a policy in return for a deal that limits how much actual tax rates go up for high-income households.
Taken on its own, the deduction limit wouldn't make a huge difference. But it can play an important role in a broad plan to cut the deficit, and shows a willingness to tackle once sacred cows. The tax numbers suggest it may not be hard to structure deduction limits in a way that leaves most middle-income households untouched.
With the mortgage interest deduction, households realized tax savings of $83 billion in 2010, according to figures from the Reason Foundation. The bulk of those savings are enjoyed by the higher earners.
There are a range of ways to increase tax revenue by aiming at higher earners, some less comprehensive than others. For instance, the interest deduction relating to second homes could be ended. Also, the cap on mortgage debt eligible for the interest rate deduction - currently $1 million — could be reduced.
There are broader approaches, too. In its proposed budget, the Obama administration plans to focus on top earners. The administration suggests capping deductions at 28 percent for high-income households, those earning more than $250,000.
Under the current rules, a high-earning household deducting $20,000 in interest payments would probably apply a 35 percent rate to that amount and receive $7,000 in tax savings. The Obama budget aims to limit that tax saving by capping that rate at 28 percent. If that rate were applied to $20,000 of interest payments, the saving would fall to $5,800.
The United States would capture the difference. Over the next 10 years, that 28 percent cap could increase tax revenue by $584 billion, according to the Treasury Department.
Separately, the Obama administration also wants to limit high earners' deductions by letting certain Bush-era exemptions expire. Altogether, the Treasury Department thinks it could raise $749 billion over 10 years by limiting deductions for higher earners. That's substantially more than the $684 billion it thinks it could raise from increasing their tax rates.
Still, there are situations where certain middle-income earners do get hit by deduction limits.
Consider a policy that uses a dollar limit, and caps all deductions at $35,000. That amount would be plenty to cover most middle-income households' mortgage interest, state and local taxes and charitable giving.
But people earning more than $100,000 may start to reach the limit, according to Sidney B. Rosenberg, associate professor emeritus at the University of North Florida. He assumes a household earns $110,000 and has a $300,000 mortgage on which it pays $17,500 a year. It also pays property taxes and state taxes at estimated nationally average rates. Such a family would have nearly $35,000 of deductible expenses, Dr. Rosenberg calculates.