Who Benefits from the Mortgage Interest Deduction?

If the mortgage interest deduction were to be phased out, who would lose out on the subsidy?

The federal income tax code is riddled with loopholes, deductions, and credits designed to promote various social goals and benefit assorted groups of Americans. One of the largest of these is the mortgage interest deduction (MID), which allowed taxpayers to claim benefits of $82.7 billion in 2010, the latest data available. However, only 32.6 percent of income tax returns in 2010 had any itemized deductions, and 20.8 percent of those did not claim any mortgage interest. As a result, just 22.9 percent of tax filers used the MID in 2010. This has been a relatively stable historical trend, with between 21 and 26 percent of taxpayers claiming the MID each year since 1991. Given the number of recent proposals to change the MID in some way, it is helpful to review which households are claiming the mortgage interest deduction.

Table 1 (below) shows households making $100,000 or more a year constitute 54.9 percent of those claiming the MID, and they receive 78 percent of the deduction's total benefits. The last two columns of Table 1 show the average tax savings that households in each income group receive from the MID, and what those savings represent in monthly savings. The mortgage interest deduction is not the middle-class savior it is made out to be.

For example, families making between $40,000 and $50,000 a year represented 5.3 percent of the mortgage interested that was deducted from taxable income in 2010. This means while there were very few households benefiting, they did get some benefit, averaging out to $737 a year, or $61 a month. If the difference between a family being about to buy a home or not was $61 a month, then the MID might have helped that family buy a home. We suspect that was not a common occurance, but have no way of knowning for sure. 

In 2010, the median household income was $49,277 according to the Census Bureau, so for middle class families the MID was not doing much to help buy a home. If you want to define middle class a bit broader, households making between $40,000 and $75,000 a year averaged a benefit of around $80 a month. Even if that benefit does not mean the tipping point between being able to afford a mortgage or not, it should be clear that for this expanded income range we are still only talking about 27 percent of those who claimed the MID or 6 percent of all taxpayers in 2010.

These numbers show that the MID is primarily an upper class entitlement program. At the very least, the mortgage interest deduction should be phased out and the savings applied to deficit reduction. A better solution, as we proposed in Reason's November 2011 issue, would be phasing out this deduction in its entirety and using the savings to give all taxpayers lower income tax rates. This is vastly preferable to giving a select few taxpayers an $82.7 billion tax benefit at the expense of the rest of the country.

This is an updated table from data that first appeared in "Unmasking the Mortgage Interest Deduction: Who Benefits and How Much?" published by Reason Foundation in July 2011.

Download a one-page PDF version of this table here.