Congress has encouraged homeownership by allowing the deduction of home mortgage interest payments and property taxes on primary and second homes owned by individuals. For full details on home mortgage interest deductibility as it currently stands, read the IRS publication with all of the particulars at https://www.irs.gov/publications/p936/ar02.html
Naturally to qualify for a deduction, the minimums include owning a home with a mortgage that qualifies under the IRS requirements and itemizing deductions on your annual income tax filings with the IRS. In 2013, just 30.1 percent of all tax filers itemized their deductions, 68.5 percent just took the standard deduction and 1.6 percent had zero adjusted gross income so they were unable to take any deductions, according to the Tax Foundation. This, however, varies significantly by income. The following table details percent of individuals within income brackets that itemized their deductions in 2013.
There are two proposals talked about today in altering home mortgage interest deductions. The first is to essentially double the minimum standard deduction for people that would further reduce the number of itemized filers (to be analyzed in another blog). The second proposal is to cap interest deductions coming from a $500,000 mortgage loan for married couples and $250,000 for single individuals, down from a $1 million acquisition loan today.
Why would Congress do this? The reduction to $500,000 is projected to increase tax revenue collections anywhere from $95 billion to $300 billion in the next 10 years. It’s all about money.
Obviously, the greater the income of individual or couple, the greater probability they have to benefit from the ability to deduct home mortgage interest and property taxes.
Who benefits the most from the ability to deduct mortgage interest? And if Congress changes the deduction, who will be most impacted? According to the Tax Foundation, the typical home mortgage interest deduction varies across states depending on both relative incomes and home values.
The Tax Foundation analyzed the average benefit of the mortgage interest deduction by state. The average deduction is calculated by dividing the total amount of home mortgage deductions by the total number of tax returns on a state-by-state basis. The following table shows the average deduction per tax filer by state, sorted alphabetically and from the largest to smallest average mortgage interest tax deduction. When entering the data the high correlation between states with the greatest average deduction that voted Democrat in the 2016 Presidential Election and also the lowest average deduction states that voted Republican became obvious. The top-10 states with the greatest average mortgage interest deductions all voted Democrat in the Presidential election, while the 18 states with the lowest average home mortgage interest deduction voted Republican.
Not only are people that have greater incomes and own more expensive homes more likely to itemize deductions in their annual tax filings, so are those that reside in states with high state and local income taxes – which are also deductible.
To read the entire review by the Tax Foundation click https://taxfoundation.org/home-mortgage-interest-deduction-state-2017/?utm_source=Tax+Foundation+Newsletters&utm_campaign=18fdd2ac04-EMAIL_CAMPAIGN_2017_08_03&utm_medium=email&utm_term=0_8387957ec9-18fdd2ac04-427662773&mc_cid=18fdd2ac04&mc_eid=c79ab314e3
So which states would pay the greatest percentage increase in taxes if Congress cuts interest deductibility from the maximum acquisition loan amount of $1 million to $500,000? Just look at the right hand columns and start at the top—those will be the most impacted states. Such a cut, however, would impact some people in every state.