How Md. benefits from the mortgage-interest deduction
Marylanders get good use out of the federal tax deduction for mortgage interest. Thirty-eight percent of taxpayer returns from the state claimed it in 2008 -- the largest share in the nation, according to the Tax Foundation.
The average nationwide, by contrast, was 27 percent. North Dakota residents were at the other extreme, with just 15 percent of taxpayers claiming the sweetener for borrowers.
The average amount deducted by Marylanders getting the tax break was nearly $14,200, fifth highest in the nation. (The U.S. average was $12,200, but nearly half the states were below $10,000 -- the average was pulled up by the higher-deduction places.)
Tax Foundation Chief Economist Patrick Fleenor wrote in the new report that high-income states tend to have higher deductions.
"In those states, people leverage their incomes to take out huge loans for expensive homes," he wrote. "The large monthly mortgage payments that result are, with frequent refinancing, mostly interest payments, not payments on principal. This maximizes the amount deducted, and since these same high-income people are thrust into a higher marginal tax bracket by the federal income tax's progressive rate structure, the deduction saves them substantially more."
"Sound tax policy dictates that interest payments be deductible only when they are incurred to produce taxable income, such as those resulting from a small business loan," Fleenor wrote in the report. "Mortgage interest on a principal residence doesn't meet this requirement, but a special exception was carved out at the inception of the income tax in 1913, and the mortgage interest deduction has become one of the largest and most sacrosanct loopholes in the tax code."
These are the states where filers claimed the largest deductions:
1. California ($18,876)
2. Hawaii ($16,730)
3. Nevada ($15,502)
4. Washington state ($14,262)
5. Maryland ($14,162)
6. Virginia ($14,094)
7. Arizona ($13,616)
8. Florida ($13,375)
9. Colorado ($13,300)
10. New Jersey ($13,215)
In case you're wondering why 27 percent of American taxpayers are claiming the mortgage-interest tax deduction even though many more own homes: Some have paid off their mortgages, so they don't qualify. Others, the Tax Foundation notes, "live in low-cost homes for which the deduction isn't large enough to make a tax difference, so they don't itemize deductions on their tax returns."
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Comments
Jamie, outside of MD the list looks like the foreclosure top 10. Any correlation?
Posted by: Jeff | May 26, 2010 8:14 AM
Hi, Jeff. It's not entirely -- think of Michigan and Ohio, which are choked with foreclosures. I think it's more that so many people bought homes in Florida, Arizona, California and Nevada in particular during the bubble that they've got a lot of interest to deduct. Similar trend to foreclosures, just not A causing B.
What do you all think? Is the mortgage-interest deduction encouraging people to buy when they shouldn't, increasing foreclosures?
Posted by: Jamie Smith Hopkins | May 26, 2010 9:05 AM
Jamie,
To answer your question: Absolutely!
This is one of the main selling points used by snakeoil salesman (a.k.a. realtors).
I would love to see the deduction done away with - I just see it as another government intervention in the free market.
Downside is that I am sure our current politicians would find a way to squander the huge windfall, rather than use it to pay down debt.
Posted by: Darwin Rules | May 26, 2010 10:02 AM
It really highlights how the standard deduction is an either/or to itemized deductions and not a base deduction you can stack your itemizations on top of. I learned that years ago when I had to buy almost $1000 worth of Marine uniforms and found out none of it was deductible in my case.
As a practical matter, especially at current interest rates, for a standard W-2 employee filing single, the $5700 itemization threshold makes the first $100,000 of any mortgage NOT tax deductible.
This last part deserves all caps, but I'll refrain: Given the $11,400 itemized deduction threshold for married couples, the first $200,000 of mortgage debt is not tax deductible for most W-2 employees.
Bottom line, if you're married and taking out anything less than a 200k mortgage, unless you're self employed, or somehow itemizing heavily elsewhere, you are getting no tax break.
Posted by: Josh Dowlut | May 26, 2010 2:42 PM
Mr. Dowlut:
Am I safe in assuming that you aren't the charitable type, or has the mortgage biz been tanking?
Posted by: "Little Debbie" | May 26, 2010 3:24 PM
Regarding the quote on "sound tax policy", the mortgage interest deduction was never "tax policy" per se, it's social policy, which is fine with me. But in the bubble frenzy it was abused, not to buy homes but furniture, suvs, or to speculate. There was a point at which universities balked at giving loans or financial aid to people who they urged "should get a second mortgage" instead.
That said, I agree with the "snakeoil" comment about pressure tactics and I've never understood the logic of prefering to fork money over to banks rather than the government, since as someone pointed out the vast majority of the interest payments to banks are NOT deductible, even beyond the first 200k. Banks don't provide roads, trash pickup, etc etc governments do.
My very first home was a dreadful fixer-upper that, with a little help from parents, managed to pay for in cash. People thought I was nuts, but I did the figures and found I'd end up paying a heck of a lot more in interest that I would have "saved" on taxed.
Posted by: lisa | May 27, 2010 2:44 AM
Does this "Little Debbie" have anything to contribute aside from her nastiness?
Posted by: Anonymous | May 27, 2010 8:07 AM
I completely agree with Josh's general point, and it's a really important one.
But I'm not so sure that his numbers are quite right, especially if you live in Baltimore city. Take a married couple making $125K/yr and carrying a 200K mortgage on a 250K home.
Annually, they will pay:
6K - baltimore city property taxes
10K - state and local taxes
Thus, they are already OVER the itemized bar before the mortgage interest deduction.
Now it would look very different for a couple living in the county making $60K:
3K - property tax
4K - state and local tax
But even then it seems to me that the mortgage would only need to be about 100K to make the interest put you over the standard deduction.
It's true that the mortgage interest deduction is very often THE difference between itemizing and not, but in addition, I think a lot of people are already very close to the itemized line just with property tax, state tax, local tax, charitable contributions, etc.
On the property we own in the city, we could itemize just based on property taxes and our state and local taxes - even if we owned the property outright we'd itemize.
Posted by: fronesis | May 27, 2010 10:07 AM
Fronesis,
You're right, thanks for pointing out my oversight of state income tax deductibility from federal taxes. I also thank you for making your point without resorting to ad hominem.
Posted by: Josh | May 27, 2010 2:01 PM
I like to see discussion, I like reasoned arguments and I especially like reasoned arguments with no subtle (or unsubtle) "you suck" barbs aimed at fellow commenters. So thanks to all who are politely disagreeing.
If you're tempted to do otherwise, remember: We're all in the same sandbox. Peeing in it does no one any good.
Posted by: Jamie Smith Hopkins | May 27, 2010 2:12 PM