Mortgage Interest Tax Deduction Doesn’t Help Homeownership?

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The mortgage interest tax deduction primarily helps the wealthy buy bigger houses rather than increase homeownership rates, according to a new study quoted by this WSJ article. The study found that such tax benefits have help increase the size of house by as much as 18% in affluent areas. Here is a graphic of the average annual tax savings from 10 major metro areas, broken down into households earning over and under $100,000 a year.


My non-political thoughts:

Don’t overestimate the benefit of the mortgage tax deduction. It is easy to simply take your marginal tax bracket (say, 28%) and say that you’re saving 28% on all your mortgage interest. But mortgage interest is only tax-deductible if you itemize, which encompasses just 30-40% of Americans. Even then, you should consider the incremental savings above the standard deduction.

Everyone can take the standard deduction, which in 2014 is $12,400 for married filing joints and $6,200 for single filers. Let’s say your mortgage is for $250,000 and the interest rate is 4%. That’s $10,000 in interest annually. So far, the married folks have no tax benefit at all! You would need a lot of other deductions like state income tax, property tax, and charitable contributions to push you over the hump. For example if you have $7,400 in other deductions, then only half of your mortgage interest ($5,000 out of $10,000) is actually saving you anything extra in taxes.

Accordingly, the study quoted above also found that homeowners with incomes above $100,000 were between three and four times as likely to claim the tax benefit as those earning less than $100,000.

Even if you do itemize and have a high income (~$254k for single, ~$305k for married filing joint), look up the new Pease Limitation which reduces the value of various deductions including mortgage interest, state/local taxes, and charitable contributions.

Be prepared that the mortgage interest tax deduction may go away. I’m not going to talk about whether or not it should go away, but realistically there is a chance that it will. If it does disappear, it think it would be done gradually to prevent a shock to housing prices. However, I wouldn’t buy a house where I am depending on the tax deduction to maintain affordability. Tax laws change.

My prediction is that the mortgage interest tax deduction is still too popular to be completely nuked. Most likely there will be more legislation that nibbles around the edges like the mentioned Pease limitation that does a income phase-out or the total loan amount allowed will be reduced from the current $1,000,000 cap.

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  1. Rdigglesworth says

    Hallelujah! We just bought our first house last year (I was 35!!!). I always tried to tell people that the mortgage interest deduction is really not as HUGE of a benefit as people make it out to be. It’s nice that it’s out there, but people talk about it like they are so smart to buy a house because they are going to save SOOOO much in income tax. It’s simply not true and the numbers above prove that.

  2. In general I am skeptical of every study I see that says “this or that tax break disproportionately benefits the wealthy because their income cohort gets a higher average $ deduction than a lower income cohort.” The reason for my skepticism is because the high earners pay more in taxes, so it is obvious that they will get a larger average dollar amount of any deduction. The more you earn in wages, the more taxes you pay, so therefore the bigger your deductions will be. I’d rather pay low taxes than pay a lot in taxes but have a larger deduction!

    Also, from personal experience I know that after AMT and PEP and Pease, nearly my entire mortgage deduction and/or state and local income tax deductions are taken away (they are fungible, really). So personally I am indifferent to a removal of the mortgage deduction and think it would probably be good public policy.

    I know there is a lot of popular sentiment that the rich avoid taxes and although I don’t consider myself rich, unless you get your income from capital gains and/or donate a lot of your income to charity, people with mostly W2 income generally don’t have ways to avoid paying a big chunk of their income to the IRS. On the contrary, with AMT and these deduction phase-outs, higher earners actually have many fewer deductions available to them than low and middle-income earners. This is probably appropriate, but I don’t know if people who embrace the “pay your fair share” mentality recognize it.

  3. Ken in Georgia says

    Another perspective on all of this that the tax deduction is something of a government “subsidy” that keeps mortgage rates artificially higher than they should be. I’m sure people smarter than me have probably done numerous studies on this, so I may be off base. However the arm chair economist in me believes that the removal of the mortgage interest deduction might make lenders compete more intensely for customers (or at least the most credit worthy ones) — possibly driving down rates.

  4. Each year, we give earners making over $200/k year a $70 billion subsidy in the form of the home mortgage interest deduction (HMID). That is far more than the entire Section 8 program budget that allows families in poverty to move into affordable apartments. To me, that is an outrageous way we subsidize the wealthy, and yet we have thousands of veterans who are involuntarily homeless. The right always focus on welfare to the most vulnerable in our society, but they always ignore the welfare to the richest Americans.

    • moshennik says

      Wow.. that’s deep. YOU give subsidy, by allowing us to keep some of our hard-earned money? Yet the rest of our EARNED money are spent to fund Section 8 and other moocher programs.
      Those who make money pay for those who mooch, your “outrage” would be funny if it was not sad.

      • You are going to have to move beyond the smug righteous slogans and see there is more to the system than what the right spotlights.

        • moshennik says

          This has nothing to do with being right or left.
          Do you actually think money earned belongs to those who earn them? Or they them belong to “the government” and they allow those who earn them to keep a portion?

  5. The tax laws are designed to favor high income earners.

    Consider 401k. It benefits the upper middle class overwhelmingly. Who can really take the max out each year and probably get company matching? – not the couple making 100k a year. Before gains, we got to put over 40k into our retirement tax free last year. That’s almost as much as the average yearly US household income.

    Flex spending – same thing.

    Childcare – same thing (and this one seems low to us with only 5k deductible – even though one kid is easily over 10k a year)

    Mortgage deduction (don’t forget property tax) – same. A couple spending 12k a year on a house ans 2k on property taxes won’t feel a big relief. A couple making 200k+ and getting 10k back sees it.

    Then we move on to the biggies – employee stock plans, cap gains, rental income. These are tools that help the upper middle class make gobs more cash than the rest. Profits on rentals can be wiped out (so show no profit) with the right mix of interest, “expenses” and depreciation. Eventually when you sell the cap gains laws even with depreciation recapture play to your benefit. It pays to invest.

    Employee stock plans can’t really be fully used by joe employee making 50k a year. But a double income family pulling in 200k+ can easily hand over 10% to their company for a guaranteed 15% (or more) profit. When they do finally cash out the stock they can often work it so it’s a long term cap gain – thus only 15%.
    Again, it pays to invest.

    The only thing the high income earners cannot contribute to is a Roth IRA.

    And yes, we take advantage of all these things. I still feel guilty about how much we’re able to save each year compared to others.

    • Don’t agree. My husband and I make just under 100,000 (no kids yet) and put away roughly 23,000 a year in our 401K. Okay – it isn’t the 34k max that we could but we put a huge chunk away. During this we have also saved roughly 80,000 dollars and just bought a 15,000 dollar car with cash. We paid for our wedding a few years ago, paid off 50,000 in student loads over the past 8 years and still live nicely and travel. We both work for private companies so no stock options available. And we are in our late 20’s. We don’t own a house yet because it isn’t the best choice for us based on taxes, misc expenses and mortgage cost.

  6. I don’t get why the government picks winners and losers like this. I work in a state (NV) that pays far more taxes than it receives (, and with todays interest rates & real estate prices, very few married people I know itemize, and the ones that do get a small benefit. It baffles me why deductions for mortgage interest and state & local taxes are allowed, since the benefit basically goes to people in a handful of states (NY, CA, NJ) that have systematically increased the cost of living through high taxes, super generous public spending and land use restrictions.

  7. Yeah, I still haven’t figured out what situation would lead to tax benefits for being married. Before my wife and I decided that for some reason (I’m sure my wife knows why) our union needed to be recognized by the government, when tax time came, she’d get the standard deduction (whatever it is, ~$6k), and I’d itemize, getting about $15k for my mortgage and real estate taxes. So we’d total about $21k in deductions.

    Now we both have to either itemize or take the standard deduction. So either $12k or $15k (she has negligible deductions to itemize). Same combined income, but we lose one single person’s standard deduction in deductions. Awesome.

  8. CA and NY pay more in taxes than they get back too.

    I don’t know many people who don’t itemize but I think that’s kinda like assortative mating, just extending to friends too. People you go to college with and work with become your friends and you lead pretty similar lives…

  9. Not sure why government is in the business of social engineering and picking winners and losers when it comes to buying a house, or getting married, or having children, or going to college, or installing new windows, etc. Each of these things create mal-investment and artificially high prices due to increased demand. We do pay for it either through taxes or through the devaluation of our currency.

    I’d be in favor of doing away with all of these deductions even though I benefit from a couple of them and lowering the rates across the board. Personally, I’d favor a tax on spending, not on income, but first, I think there needs to be a serious discussion about the proper role of the Federal government. It has really gotten out of hand and they’re doing things and spending money on things that they have no business being involved in – and this is not a statement in favor of one political party over another. In recent years, they’ve both been terrible.

  10. Fred Fnord says

    While I absolutely agree that the mortgage interest deduction should probably go away (though I am one of the people most likely to benefit from it), it is worth noting that the graph above is preeeetty misleading, at least as far as San Francisco is concerned.

    Unless one is incredibly lucky (and wins the housing lottery to get one of the below-market-rate units in San Francisco) NOBODY with a household income of less than $100,000 can buy a house here, nor have they been able to in a long time. So the numbers for San Francisco for more or less 100% of the people under $100,000 are for people who are in heavily subsidized housing purchase programs, which distorts the numbers a great deal.

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