Mortgage Interest Deduction Usage by Tax Bracket

July 25th, 2012 by 

About a month ago, my colleague Cameron penned an article about the MID - namely, whether it is a good idea or not.  For an itemizing taxpayer in the 25% bracket, he pointed out, "The bank receives 4.0% interest, the homeowner pays 3.0% and the taxpayer is left footing the 1.0% difference."  Right - and the bank ends up pocketing the subsidy.  So let's explore who, exactly, is using the mortgage interest deduction - and you can draw a conclusion about whether or not it's a good idea.

The Mortgage Interest Deduction - a Political Third Rail

Now, politically, the mortgage interest deduction is a sacred cow.  In 2009, 26% of all tax returns had some mortgage interest itemized - a whopping 36,541,820 returns, in total.  How did it break down?  Well, let me present it for you graphically by income bracket.  Again, this is 2009 IRS tax data, you can follow and graph it for other years but the result is much the same:

Mortgage interest deduction by income bracket

Percent in Bracket taking the Mortgage Interest Deduction

The Mortgage Interest Deduction is a Middle to Upper Class Deduction

As you can see, a majority of taxpayers making between $75,000 and $10,000,000 are the ones taking the mortgage interest deduction the most - these taxpayers, I don't think anyone would argue against, are in the middle, upper middle, and upper class (I make that determination without knowing a net worth - but affluence is guaranteed).

It's probably not too shocking a result - it takes a certain income to make enough to own a house, and only the higher incomes will have enough mortgage interest to override the standard deduction.  Compound that with state income tax deductions (and property tax) and you can see the confluence of factors it would take to get this chart.  But this is how it is - it's a politically protected deduction because of who takes the deduction.

And for the record, I'm part of the club.

What do you think about the mortgage interest deduction?



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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