Fiscal Fact No. 230
Newly released IRS taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. data by state for 2008 illustrate how much more the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the 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 incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross 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 bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. 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.
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Table 1 |
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|
State |
Percentage of Returns Claiming Deduction |
Rank |
Average Deduction |
Rank |
Average Deduction |
Rank |
|
United States |
26.83% |
$ 3,279 |
$ 12,221 |
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|
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 |
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Tax Foundation calculations based on IRS data |