Which State Benefits the Most from the Mortgage Interest Deduction?

Posted By PK Last updated October 11th, 2012 14 Comments

The last time we talked about the mortgage interest deduction, I shared with you a chart on the percentage of returns in each income group taking the mortgage interest deduction. Today let’s take it a step further and look at the mortgage interest deduction geographically (2007 IRS Data).

Maryland in the Lead!

With a whopping 37.55% of returns in Maryland both itemizing and declaring the mortgage interest deduction, it takes the grand prize for the biggest state usage of the tax break. Interesting how the area around Washington D.C. seems wedded to the benefit, isn’t it? Perhaps not when you consider that the area around D.C. is the richest place in the country (take that, SF Bay Area!)

Of course, switching to the average deduction taken puts California back into the lead. Perhaps there’s something to that? Well, maybe it’s that big state income tax which means many people with mortgages are going to itemize anyway (count me among the lucky ones.)

Outside of that, you can see that the states on the east and west coasts (and Nevada, Colorado, and Utah) tend to take advantage of the deduction most, along with the midwest. The center of the country? Not so much.

Does this infographic change your perspective on the mortgage interest deduction? What do the figures look like in your state?

If you enjoyed this post, let others know!

JT

I can’t seem to figure this out. I guess the areas with the most mortgage interest deductions by percentage of tax returns would be the best areas to live – areas where the most people have an income large enough to buy a home? Then again, it’s very possible that in some places – Indiana, for example – homes simply are not costly enough for many people to actually get a deduction.

It’d be very interesting to see how this changes over time. With rates testing new lows every day, I would think that more people would be levering up on their homes to take out inexpensive equity to the extent that there would be more mortgage interest deductions today than…say, 1997.

Very cool!
- http://www.dqydj.net/ PK
  
  Yeah, I can figure that out – I think we can even go back one further, to 1996. I’ll see what I can come up with in another piece.
  
  Yeah, intuitively that’s a good theory – but as we saw in that mortgage rate vs price piece, that correlation has broken down since 2006. I don’t know if that extends to people buying move-up homes (perhaps it’s all entry level?), but I wouldn’t bet that some of the demographic is still ultra-excited about the low rates. Here’s my maybe obvious point:
  
  To have the deduction, you need to have a state with both high property prices and either high property taxes, high income taxes, or high sales taxes (that’s a new/recent one)… enough to put many home-buyers into the deduction.
  
  For the record, California has high enough taxes I itemized even before I had a house.
  - AverageJoe
    
    Itemized without a house! Holy high tax rate, Batman!
    - http://www.dqydj.net/ PK
      
      And there are two propositions, 30 and 38, which would love to raise taxes even further in the state.
      
      But hey, great weather!
- CameronDaniels
  
  The counterpoint is also true with the interest rates. Since the deduction is ONLY on interest payments for the home, the usage of the deduction should naturally slope with higher interest payments (holding homeownership and home prices constant impossibly). I think a lot of the high usage states as has been mentioned are where high state income or sales taxes naturally push the incentive for declaring property tax + mortgage interest as a tax benefit further.
  
  It also makes more sense to declare if your tax rate is higher (higher income) due to returning $0.35 or $0.28 on every dollar declared as opposed to $0.25 or $0.15
Bichon

I assume by mortgage interest deduction you mean the one via Schedule A. I think it is difficult to make a generalization. As you point out, not only is there a lot of money in DC, but I suspect there are quite a few people who own a second home there as well. But, not sure what state they would file in or how the data was tallied up. But anyway, that’s interest/property taxes on 2 loans.

The state I live in receives below average wages for comparable jobs elsewhere in the US. And therefore, the housing is much lower cost (my house in Texas cost twice as much on a $/sq ft basis and my house now is MUCH nicer). But, my current state of residence has a very high utilization of the “mortgage interest deduction.” Even with lower home prices, lower wages etc. My suggestion would be it is b/c of the local culture. Many people pay 10% of their gross income to their church. So, with state taxes and a 10% donation, a couple would have to bring in $80k to start filling out schedule A, and that is before any other sections on schedule. Add a modest house in there and it is easy to see one would not have to make very much to file a schedule A.

The “mortgage interest deduction” does not comprise the entire Schedule A. More helpful (as almost always someone will grumble with any set of data) would be the breakdown on those who did file schedule A’s based on each section, by state.
- http://www.dqydj.net/ PK
  
  Fair enough, but this was more of a “while we’re on the topic of mortgages…” sort of deal. I don’t imagine I’d change the methodology too much even if it wasn’t something like the mortgage interest deduction. Case in point: my first dollar of charitable donations is a write off, because of all of the aforementioned things… high income taxes, property taxes, and interest. So if I donate $1 to charity, am I ‘benefiting’? Probably not – but I would still show up in the state stats.
  
  More of an interesting thing than anything else? Oh, I was sloppy on the source, but I attached it above (before you had to click through to the ManyEyes chart to see it).
- freeby50
  
  Bichon, OK lets look at Utah as an example. Seems like a state that might fit what you describe, relatively low income, low housing, high church contribution (Mormons) and high mortgage interest deduction rates. IRS has 2009 data by state. In Utah 33% of filers have contributions claimed on schedule A with average amount of $7,142. That is significant. Compared to say Texas where 22% of people claim deductions on Schedule A for average of $5,215. Add in the state income tax in Utah and you have a lot more people with other schedule A deductions to push them over the standard deduction regardless of mortgage interest amount.
  
  As far as 2nd homes go, I doubt that has much impact. Only a small % of people really have 2nd homes. (not counting rental, properties which are not on schedule A) The vast majority of people with 2nd homes are going to be high income to begin with and those people claim deductions most of the time.
freeby50

I would have guessed the most would be in California since housing costs there are so high. But in a state like CA the homes are SO expensive that fewer people own and more rent, so home ownership rates are low. So what I think we’re seeing here is a balance point between higher cost homes to get to the point that people pay enough interest to make a deduction and not being too costly which drives down homeownership. Other deductions also impact it. If property tax and state income tax are higher then more people will have reason to itemize. Compare Oregon and Alaska. Average deductions are similar about $11k but about 10% more people claim the deduction in OR, likely do to state taxes and property taxes pushing more people above the standard deduction.
- http://www.dqydj.net/ PK
  
  I thought so too, but there is also less turnover in California due to Proposition 13, a 1978 initiative which caps property tax increases at 2% a year. When we bought our house it was from the original 70s owner, and the ‘appraised value’ was something absurd like $110,000. Not anymore, to say the least.
  
  And yes, completely agree on other deductions – like I responded to Bichon, for a ton of Californians, they get first dollar write-offs of charity dollars (I imagine it’s the same in some of these other high-tax areas). Since a $1 donation would show up as a donator, does that extra person really mean California is more generous?
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101 Centavos

A bit depressing that Maryland and the DC environs are the wealthiest in the nation, even though it stands to reason. Follow the money…
- http://www.dqydj.net/ PK
  
  Yeah, there is a ton of money there. I’ll have to do a full article but you’ve got the confluence of politicians, lawyers, lobbyists (ex-the first twos!) and defense contractors.
  
  Follow that money!
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