We all know the old saying about statistics—they can say anything you want them to—and in many cases, like the value of the mortgage interest deduction, it’s particularly true. Academic economists as well as those from trade organizations and foundations, from Libertarian to Liberal, are weighing in, and they’re all using data from the IRS that’s published yearly by the Joint Committee on Taxation. So you might think it would tell a similar story. Well, it all depends…
There are total amounts, percentages, different definitions of income, etc. So, where you make the cutoff of upper class versus middle class is all-important. (Note, I left out the polarizing term “rich.”)
For example, if the cutoff for where middle class ends and upper class begins is $100,000, then the group of people making over $100,000 represent 41 percent of people who claim a mortgage interest deduction, and they get 82 percent of the total benefit. Maybe it’s not surprising to anyone, but they also pay about 82 percent of all taxes. So, you would think, OK, the most benefit goes to people who make the most money (and probably have the more expensive homes and mortgages), and pay the most taxes. Fair, I guess.
Until you look at the average tax savings as a percent of the total tax bill. Then the story turns around. For people making between $40,000-$50,000 a year, the tax savings represents 11.3 percent of their tax bill, and for those making $50,000-$100,000, it’s about 7.5 percent savings as a percent of their tax bill versus a mere 1.8 percent for people making over $200,000. So, the bigger percentage benefit goes to the people in the middle classes. Many pundits suggest that the middle class gets the most benefit from the mortgage interest deduction, and maybe as a percent of their tax bill, they do.
Until you look at the total value of the benefit, and then it’s a joke. People making over $200,000 get an average tax savings of $1,862, versus the person making $40,000-$50,000, who gets a whopping $120 tax reduction. But looking at it this way, it’s hard to understand what the big deal would be about eliminating the deduction. Even at $50,000 a year income, $120 is not a meaningful amount of tax savings over a year ($10/month), nor is $1,862 such a big savings for someone making $200,000/year ($16,663 of income per month with a monthly tax savings of $155 –a nice dinner for two perhaps).
What do you think?
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Anne Murray-Randolph is a specialist in the real estate consumer, providing data-based knowledge and perspective to the industry. She was also the co-founder and publisher of LORE: Lives of Real Estate Magazine. You can find her as “peekinthetent” on Twitter and the Real Trends Blog.2 Responses to “Mortgage Interest Deduction: Same Data, Different Views”
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Where do you come up with these numbers. As someone in the 40-50K adjusted gross and taxes at 9-10K 11 plus percent is not $120 but over $1000. What Am I missing here?
Hi Del! It is somewhat counter-intuitive since many people are in the early years of their mortgage and are paying much more in interest and thereby claiming more of a mortgage interest deduction. However, the numbers are from several sources including HousingEconomics.com, a part of the National Association of Home Builders, The Reason Foundation, and the Center for Housing and Financial Markets at the Hudson Institute. All three use similar data and come up with slightly different numbers, but all in a similar range. There were2.923 million returns that claimed a mortgage interest deduction – or 8.4% of the total returns in that income category. The average annual amount was $797, and the average tax savings was $120. This was from the IRS information, as reported by the Reason Foundation. But I also checked a similar analysis from the National Assoc. of Home Builders and others. Your particular mortgage circumstances might be different. But this is from reliable (IRS data) as analyzed by three difference sources all coming up with essentially the same result. If this doesn’t help, I would happy to send you the citations so you can read them yourself. Or send me an email with additional questions.