By John Voket
I was somewhat shocked to discover a recent Pew survey showing about half of homeowners who might qualify to take a mortgage deduction on their federal income tax, chose not to do it.
According to the survey, one of the largest tax expenditures in the U.S. tax code is the deduction for home mortgage interest. Tax filers who own a home and itemize their deductions are allowed to subtract interest paid on mortgage debt from their income.
The report states that before the onset of the housing crisis and the beginning of the Great Recession, the total mortgage interest deducted by tax filers hit its peak in 2007, resulting in $543 billion in deductions and roughly $85 billion in forgone revenue.
But between 2007 and 2010, the total deduction amount fell 28 percent, and the number of claims declined by 12 percent. The report also shows that the geographic distribution of this tax expenditure generally is skewed toward areas with relatively high incomes and property values.
The report, for the first time, uses detailed ZIP-code-level data from the Internal Revenue Service to show that the distribution of the deduction appears even more skewed at the metropolitan area level, with tax filers in and around major metropolitan areas generally claiming the deduction at much higher rates and greater average amounts than filers in less-populous areas.
Other factors influencing the distribution, including differences in housing turnover frequency and the proportion of tax filers living in rental housing.
With changes to tax expenditures under consideration, the Pew study poses that data showing the current geographic distribution of the mortgage interest deduction should initiate informed discussion about how changes to tax policy would affect home owners in individual states.
Any modification to the deduction — such as eliminating it, capping itemized deductions generally, limiting deductions to mortgage interest paid for first homes, or replacing the deduction with a credit — would likely alter the distribution of this federal tax expenditure across geographic areas.
Depending on how any changes are structured, federal taxes could increase in some areas and decrease in others. So the issue of home mortgage deductions may be a topic worth following whether you are taking advantage of the tax benefit or not.