Tax Savings from Mortgage Interest Deduction Vary Significantly from State to State

May 25, 2010

Fiscal Fact No. 230

Newly released IRS tax data by state for 2008 illustrate how much more the mortgage interest deduction is worth to some states than others (see Table 1 below). Sound tax policy dictates that interest payments be deductible only when they are incurred to produce taxable income, such as those resulting from a small business loan. Mortgage interest on a principal residence doesn't meet this requirement, but a special exception was carved out at the inception of the income tax in 1913, and the mortgage interest deduction has become one of the largest and most sacrosanct loopholes in the tax code.

For tax year 2008, a little over one quarter of the nation's tax returns claimed the mortgage interest deduction, 26.8 percent of the nation's 143 million tax returns. Rates of home ownership are much higher than this, but many home owners don't claim the deduction. Often they live in low-cost homes for which the deduction isn't large enough to make a tax difference, so they don't itemize deductions on their tax returns. In addition, home owners who have paid off their mortgages make no interest payments to deduct.

The average tax return in the U.S. deducted $3,279 in mortgage interest; that includes all tax returns, even the non-homeowners and non-itemizers. Counting only the tax returns that deducted mortgage interest, the average amount was $12,221.

Overall, Maryland and California are the biggest winners. Maryland had the highest percentage of tax returns claiming the deduction, 37.9 percent, and average dollar amounts claimed were also high. It had the second-highest average deduction among all tax returns, $5,372, and counting only the tax returns that claim the mortgage interest deduction, the average Maryland tax return claimed $14,162 in mortgage interest. That is the fifth highest nationwide.

California had a lower percentage of tax returns claiming the deduction, but when Californians deduct mortgage interest, the amounts are high. Of California's 16.4 million tax returns, about three in ten deducted mortgage interest, 29.2 percent, 19th highest nationwide. But California ranked highest in average deduction among deducting returns, $18,876, and also highest among all returns, $5,520. Hawaii also ranked high, with its famously expensive homes, as did Nevada which has been growing so quickly that more of its home owners are in the early years of their mortgages when interest payments are high.

The savings from state to state vary for two main reasons. First and most importantly, some states have higher average incomes. In those states, people leverage their incomes to take out huge loans for expensive homes. The large monthly mortgage payments that result are, with frequent refinancing, mostly interest payments, not payments on principal. This maximizes the amount deducted, and since these same high-income people are thrust into a higher marginal tax bracket by the federal income tax's progressive rate structure, the deduction saves them substantially more.

In some locations, renting is more prevalent. New York City is the obvious example, where the existence of expensive homes is outweighed by a large number of people claiming no deduction because they rent their homes.

Table 1
Mortgage Interest Deduction by State, Tax Year 2008

State

Percentage of Returns Claiming Deduction

Rank

Average Deduction
(all returns)

Rank

Average Deduction
(for returns claiming one)

Rank

United States

26.83%

$ 3,279

$ 12,221

Alabama

24.02%

32

$ 2,226

36

$ 9,267

38

Alaska

22.42%

38

$ 2,689

24

$ 11,994

16

Arizona

31.53%

11

$ 4,293

9

$ 13,616

7

Arkansas

19.24%

45

$ 1,610

46

$ 8,365

45

California

29.24%

19

$ 5,520

1

$ 18,876

1

Colorado

34.54%

3

$ 4,594

4

$ 13,300

9

Connecticut

35.15%

2

$ 4,396

8

$ 12,509

12

Delaware

31.80%

9

$ 3,817

14

$ 12,006

15

Florida

24.92%

28

$ 3,333

20

$ 13,375

8

Georgia

31.13%

12

$ 3,375

17

$ 10,844

24

Hawaii

24.20%

31

$ 4,048

11

$ 16,730

2

Idaho

29.11%

20

$ 3,081

21

$ 10,587

25

Illinois

28.78%

21

$ 3,337

19

$ 11,593

19

Indiana

23.97%

33

$ 2,070

38

$ 8,637

42

Iowa

20.35%

43

$ 1,649

45

$ 8,104

49

Kansas

23.82%

34

$ 2,060

39

$ 8,647

41

Kentucky

24.57%

30

$ 2,050

40

$ 8,345

46

Louisiana

18.68%

46

$ 1,780

43

$ 9,526

33

Maine

25.81%

25

$ 2,529

28

$ 9,798

31

Maryland

37.94%

1

$ 5,372

2

$ 14,162

5

Massachusetts

31.74%

10

$ 4,064

10

$ 12,805

11

Michigan

27.97%

22

$ 2,659

25

$ 9,505

34

Minnesota

33.71%

4

$ 3,714

16

$ 11,016

21

Mississippi

18.39%

47

$ 1,526

47

$ 8,301

47

Missouri

25.50%

26

$ 2,372

30

$ 9,303

36

Montana

23.42%

36

$ 2,316

32

$ 9,890

30

Nebraska

23.10%

37

$ 1,901

42

$ 8,233

48

Nevada

29.55%

17

$ 4,580

5

$ 15,502

3

New Hampshire

30.68%

15

$ 3,726

15

$ 12,142

14

New Jersey

33.34%

6

$ 4,406

7

$ 13,215

10

New Mexico

21.48%

39

$ 2,356

31

$ 10,969

22

New York

23.73%

35

$ 2,897

23

$ 12,206

13

North Carolina

29.43%

18

$ 2,979

22

$ 10,122

27

North Dakota

14.60%

50

$ 1,222

50

$ 8,372

44

Ohio

26.74%

23

$ 2,266

35

$ 8,475

43

Oklahoma

21.27%

40

$ 1,700

44

$ 7,992

50

Oregon

32.46%

8

$ 3,858

13

$ 11,885

17

Pennsylvania

25.07%

27

$ 2,439

29

$ 9,728

32

Rhode Island

30.74%

14

$ 3,367

18

$ 10,951

23

South Carolina

26.17%

24

$ 2,607

27

$ 9,959

28

South Dakota

14.84%

49

$ 1,396

48

$ 9,404

35

Tennessee

20.70%

41

$ 2,143

37

$ 10,349

26

Texas

20.36%

42

$ 2,027

41

$ 9,955

29

Utah

33.17%

7

$ 3,875

12

$ 11,683

18

Vermont

24.87%

29

$ 2,313

33

$ 9,299

37

Virginia

33.61%

5

$ 4,737

3

$ 14,094

6

Washington

31.04%

13

$ 4,426

6

$ 14,262

4

West Virginia

15.20%

48

$ 1,348

49

$ 8,870

39

Wisconsin

29.92%

16

$ 2,615

26

$ 8,739

40

Wyoming

20.14%

44

$ 2,285

34

$ 11,350

20

Dist. of Columbia

26.93%

$ 4,502

$ 16,720

Tax Foundation calculations based on IRS data

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