Mortgage tax deduction benefits the rich

By ELLEN SIMON, Associated Press

Posted Monday, March 3, 2008
Q: If I buy a home, how much will the mortgage-interest tax break help me?

A: The wealthier you are and the more expensive your home is, the more the mortgage-interest deduction may help you.

The interest you pay on your mortgage of up to $1 million and home equity loans of up to $100,000 is almost always tax deductible.

But that deduction is only available if you itemize your deductions -- that is, break out your deductible expenses, such as mortgage interest, charitable contributions, etc. and subtract them from your income. Since it only makes sense to itemize if your deductible expenses are greater than the Internal Revenue Service's standard deduction, which is $10,700 for a married couple filing jointly, only about half of filers with taxable income itemize.

Despite the mortgage interest deduction's reputation as a boon to the middle class, the group that takes the deduction most often is the wealthy. A study of 2006 tax filings by the Congressionally-sponsored Joint Committee on Taxation found that nearly half the households that filed tax returns itemizing a mortgage-interest deduction made $100,000 or more that year.

"There's no dispute about that. It inordinately favors high-income folks in high cost-of-living areas," said Paul L. Caron, dean of faculty at the University of Cincinnati law school.

"If you live in Danville, Ill., where the median home price is less than $100,000, there's a good chance that a lot of the people don't have mortgages big enough to make itemizing worthwhile," said Greg McBride, senior financial analyst at Bankrate.com,

Moderate-income home owners in the 10 or 15 percent tax bracket don't benefit much from a deduction, even if they do qualify, said Len Burman, director of the Tax Policy Center, a nonpartisan think tank. But wealthier people at a higher tax rate do.

"A millionaire with a million-dollar mortgage, they get to write off their interest at a 35 percent rate -- 40 percent or more if you include state taxes," he said.

Caron points out that interest paid on the mortgage of a vacation home is tax deductible. Taxpayers who have convinced the Internal Revenue Service that they spend part of their year living on their yacht have even been able to deduct interest on their yacht payments, he said.

Is the deduction a spur to homeownership? Burman argues that the homeownership rate in Canada, which has no mortgage-interest deduction, is nearly identical to the rate in the U.S.

There are some asterisks on what's deductible.

For instance, if you take out a home equity loan and you fall into the alternative minimum tax bracket ($44,350 or more in gross income for singles and heads of household in 2007, $66,250 for married couples filing jointly and $33,125 for married couples filing separately) you can only deduct interest if you use the loan to improve your home. So you get a tax break on the interest on a loan to pay for kitchen renovation, but no break for interest on a loan to pay for college.

Also, filers in the alternative minimum tax bracket can't deduct property taxes, a benefit available to others who take the deduction. Those who fall into the alternative minimum category and live in a high property-tax state would have to be paying a lot of mortgage interest to benefit from the deduction.

Then, there's the hit joint filers take if their income puts them in a category where deductions are phased out. For joint filers who make more than $159,950 in 2008, every dollar of gross income over that amount is removed from itemized deductions at a rate of 3 percent. So, if your family income were $259,950, or $100,000 over the threshold, $3,000 would be cut off your itemized deductions.

Also, mortgage interest on any homes after your first two aren't tax deductible, something Peggy Munro, author of "Taxes 2008 for Dummies" has run into with families who have a primary home, a vacation home and a condo for their college-age children. "They have to choose which two mortgages they're going to deduct," she said.