Mortgage Interest Deduction A Myth? A Middle Class Mind Set?

Interesting but no 'news break' - the mortgage interest deduction on ones taxes has been in the middle class mentality for decades if not generations. That it doesn't really help all that much isn't relative to the amount the home owner believes they are saving every month .

Perception is the holy grail of mortgage lending - the bigger the mortgage the more one saves, so borrow more to save more - makes sense, right?

Who Benefits from the Mortgage Interest Deduction?
Source: Anthony Randazzo and Dean Stansel, "Mortgage Interest Deduction Saves Middle Class Taxpayers All of $51/Month," Forbes, December 18, 2013. Anthony Randazzo and Dean Stansel, "Unmasking the Mortgage Interest Deduction: Who Benefits and by How Much? 2013 Update," Reason Foundation, December 18, 2013.

December 30, 2013

The mortgage interest deduction (MID) is the largest personal tax deduction on the books and is widely considered one of the most sacrosanct in the country because it is seen as making homeownership more affordable for middle class Americans. However, the average benefits from the MID are not enough to be the difference between renting and home owning for a household, say Anthony Randazzo, director of economic research at Reason Foundation, and Dean Stansel, an economics professor at Florida Gulf Coast University.

• The most recent data from the Joint Committee on Taxation show 34.1 million homeowners claimed $68 billion in mortgage interest deduction benefits in 2012.
• This was down from $83 billion in total MID benefits in 2010 that went to 33.6 million homeowners.

While the number looks big, it turns out the MID isn't the middle class savior it is often made out to be.

• Most of the MID 2012 tax benefits went to people making six figures or more.
• Households earning over $100,000 in 2012 claimed 77.3 percent of the total MID tax savings, essentially the same as in 2010.
• Meanwhile, homeowners earning between $30,000 and $40,000 saved an average of $587 in 2012, or $49 a month off their mortgage.
• For households making between $40,000 and $50,000 the average tax savings was $54 a month.
• Combined these groups represented just 8 percent of MID claims.

Not only are mortgage interest deduction benefits largely limited to a narrow selection of upper income homeowners making claims, but they are assisting an even smaller number of taxpayers on the whole.

• Only 25 percent of all taxpayers claimed a mortgage interest deduction in 2012.
• Only 32 percent of taxpayers itemize in the first place, and of those 79 percent claim the MID.

Supporters of the mortgage interest deduction point out that most homeowners do claim it. Opponents counter that creating loopholes in the tax code for politically favored groups is bad public policy.

If the goal of the mortgage interest deduction is to increase or assist middle class homeownership, policymakers should take a closer look at who benefits from the deduction and by how much. There are certainly more cost-effective ways to help Americans buy homes than maintaining the status quo for the mortgage interest deduction.