What is the Mortgage Interest Deduction and Who Benefits from It?
The mortgage interest deduction helps make homeownership more affordable by allowing home owners to deduct the interest that they pay on the mortgage for their home when calculating their annual federal income tax.
Contrary to assertions by some economists, the income tax deductions for mortgage interest and real estate taxes primarily benefit middle class taxpayers with incomes between $50,000 and $200,000, according to the findings of a study by the National Association of Home Builders.
Taxpayers earning less than $200,000 pay 43 percent of all income taxes. However, they receive 68 percent of the total benefit of the mortgage interest deduction and 77 percent of the total benefit of the real estate tax deduction.
Moreover, larger benefits go to larger households and families, such as those with children. And as a share of household income, larger benefits are collected by families with less than $200,000 income, indicating that these tax rules make the tax system more progressive.
The Mortgage Interest Deduction is at Risk
Ever since the federal income tax was introduced in 1913, the government has used the tax code to encourage homeownership. Now, as a result of the effort to reduce the federal deficit, the mortgage interest deduction is under fire. Proposed changes to the tax code would have a dramatic impact on home owners and would significantly reduce the value of this deduction.
How would the proposal to eliminate the mortgage interest deduction and replace it with a 12 percent nonrefundable tax credit affect a typical home owner?
Suppose a home owner paying $10,000 in mortgage interest in a year faces a marginal tax rate of 25 percent and, to keep things simple, has enough other itemized deductions that they would itemize regardless of the mortgage interest deduction.
For that home owner, the mortgage interest deduction is worth approximately 25 percent times $10,000 or $2,500 in reduced taxes paid. With a 12 percent tax credit, the home owner’s tax benefit would be reduced to $10,000 times 12 percent or $1,200.
Moreover, if other proposals affecting housing-related deductions went into effect, home owners would not be able to deduct their state and local property taxes or the interest on any home equity loan they might have and they would pay higher tax on a principal residence when sold.
A resolution that supports retaining the mortgage interest deduction is pending in the U.S. House of Representatives. Introduced by Rep. Gary Miller of California, H. Res. 25 states that “the current Federal income tax deduction for interest paid on debt secured by a first or second home should not be further restricted.”
At present, there are more than 40 co-sponsors for this important resolution.
Show YOUR support for the mortgage interest deduction and tell your Representative to co-sponsor H. Res. 25:
Call the U.S. Capitol switchboard at 202-224-3121 to reach your Representative’s office.
Visit www.House.gov to find your Representative’s website and send an e-mail in support of H. Res. 25.
AND BE SURE TO