Before I begin, I should point out that what I’m about to tell you runs contrary to what the National Association of REALTORS® (NAR), the largest trade association in the country and one I belong to and support, will tell you. The NAR position on the mortgage interest deduction (MID) is, quoting from their website, “the mortgage interest deduction (MID) is a remarkably effective tool that facilitates homeownership.” Many St Louis REALTORS® will echo the message of NAR but I think if more people took the time to look into the MID, and do a little simple math, they would see that the mortgage interest deduction does not appear to offer any real benefit to the ordinary, typical homebuyer in St Louis.
What brought this to mind this morning was a friend of mine on Facebook (who is a loan officer for a St Louis mortgage company) posted a link to an article written by an owner of a Chicago real estate company outlining the benefits of the MID and, while I think he did an excellent job of laying out the potential tax savings of deducting mortgage interest and property taxes on a home, I think he left out a key component, namely, the Standard Deduction.
Why the MID doesn’t help the normal home buyer in St Louis:
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About two years ago I wrote an article in which I pointed out that the MID primarily benefits higher income individuals and, in fact, at that time, statistics revealed that less than 9.8% of tax payers earning under $50,000 claim the MID.
Why don’t more taxpayers take the mortgage interest deduction?
The answer is simple: the standard deduction. The standard deduction is the amount that the IRS allows everyone to deduct from their income without itemizing deductions. Granted, when you choose to take the standard deduction you give up the right to deduct mortgage interest and property taxes (among other things) however, for a little more than 9 out of 10 taxpayers earning under $50,000 the standard deduction amount exceeds the amount of their itemized deductions therefore, those taxpayers really receive no benefit whatsoever from the fact that mortgage interest is deductible.
Simple math…
Here are some facts and figures as well as the simple math behind my opinion and observations:
- Median home price in St Louis – about $190,000
- Approximate household income needed for a typical borrower to qualify for a loan to buy the typical St Louis home – about $50,000
- Median household income for St Louis – about $55,000
- Approximate amount of property taxes on a median priced home in St Louis$2,700.
- Approximate amount of mortgage interest paid in first year (when the largest amount of interest is paid) on a loan for a median priced St Louis home – $8,460
- Standard deduction allowed by IRS in 2015 for a married couple – $12,600
Result:
- The total mortgage interest and property taxes (normally the two largest deductions that are itemized) for the typical St Louis home and typical home buyer works out to about $11,160 per year or about $1,440 less than the standard deduction, therefore the taxpayer would elect to go with the standard deduction. In fact, for a lot of taxpayers, even if they think they can come up with receipts and paid bills for other items that are deductible and perhaps even give them a little more deduction than the standard deduction, they opt to go ahead and go with the standard deduction to keep it simple.
What about the roughly 9% of taxpayers in this bracket that did take the MID?
- I wasn’t able to find any stats to show, for those roughly 9.8% tax payers in this bracket that did take the MID, what their itemized deductions totaled, but, for sake of conversation, how about if we assume they had a lot of deductible items (over and above their mortgage and property taxes) and it totaled $15,000. In this case, when they itemize, they will receive the benefit of theMID, however, only to the extent their deductions exceed the $12,600 standard deduction and, then, only by the rate they are taxed at. So, in the case of my example above;
- Taxpayer would deduct an additional $2,400 from their tax return. Their federal tax rate would be 15% for 2015 so the tax savings would be $360.00. So, even for the 9.8% of taxpayers in this tax bracket that took the MID, if the MID went away and they were forced to take only the standard deduction, their additional cost would be $360.00 in taxes.
Similar conclusion by others..
A little over two years ago, Benjamin H. Harris and Lucie Parker, of the Urban-Brookings Tax Policy Center, did a study on the mortgage interest deduction in which they studied the percentage of people that claim the MID by zip code and then looked at the characteristics and demographics of the zip codes with higher rates of people claiming MID. The following is the conclusion they wrote to their study: (emphasis is mine)
“The mortgage interest deduction is the largest tax expenditure for home ownership, but its value is not distributed equally across the income distribution or localities. In particular, we find that roughly half of the aggregate mortgage interest deductions are claimed by twenty percent of zip codes; zip codes with high claiming rates tend to be disproportionately white, middle-aged, and married; and counties west of the Mississippi River and on the East Coast disproportionately benefit from the MID.”
