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."