A mortgage interest deduction, or MID for short, allows taxpayers to deduct any mortgage interest paid on their primary or secondary home — up to $1 million each year.
Let’s do some math: Say you buy a home and take out a 30-year mortgage worth $200,000 with an interest rate of 4.5 percent. If your combined state and federal tax rate is 31 percent, you could save an average of $1,703 each year by using a mortgage interest deduction. That brings your interest rate down to just 3.1 percent.
Seems like a pretty good deal, right? So why, then, did two-thirds of American homeowners choose to forgo this option altogether?
Perhaps because it meant complicating their taxes a bit. In order to receive an MID, you have to itemize your taxes instead of just filing for a standard deduction. In 2015, the standard deduction for a head of household was $9,250. If your home expenses add up to less than that, then there’s no point in taking the time to itemize your taxes: The standard deduction covers them.
The MID is one of the most expensive tax breaks we have: It cost the government about $73.9 billion in 2015, according to the U.S. Treasury. And because so many Americans don’t take advantage of it, the benefits fall disproportionately to the wealthy. The top 20 percent of earners get 75 percent of the benefits, and the top 1 percent get 15 percent.
But some argue that eliminating or reducing the deduction could cause home prices to decline by up to 11 percent. That means about a $25,000 reduction in housing equity for a typical homeowner. Even if the changes are mostly in high-income areas, it’s possible that they could destabilize the entire housing market.
So there you have it. It’s a pretty complicated and sticky issue. But the next time someone brings up mortgage interest deductions, at least you can say, “Now I get it.”
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