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Thursday, February 28, 2008

AP: Who Gets the Biggest Mortgage-Interest Tax Break?

Interesting Associated Press article:  Who Gets the Biggest Mortgage-Interest Tax Break? Wealthy Homeowners:

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. ...

Moderate-income home owners in the 10 or 15% 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 also tax deductible. Taxpayers who have convinced the IRS that they spend part of their year living on their yacht have even been able to deduct interest on their yacht payments, he said. "That’s far removed from the perception of what this is all about," he said.

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Comments

Actually, the standard deduction’s reputation as a boon to the middle class, appears to be correct.
"There’s no dispute about that. It inordinately favors middle class folks in normal cost-of-living areas," said most tax return preparers with middle class educations.
Moderate-income home owners in the 10 or 15% tax bracket benefit much from the standard deduction, but wealthier people at a higher tax rate don’t. 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.
But the middle class writes off the $10,700 standard deduction, at times without paying a dime towards mortgage interest, property taxes, or even charity. Many pay just $2,000 to $3,000 in property taxes and still receive the same $10,700 standard deduction.
Throw in child tax credits, full use of exemptions, and many other credits and deductions and Spring rebates and the middle class receive many reductions to their tax bill without making a single economy boosting, environmentally friendly, socially redeeming expenditure. "That’s far removed from the perception of what this is all about," someone has said.

Posted by: Mike | Feb 28, 2008 9:41:16 AM

What deduction does not favor a person with a higher tax rate? If you have a prgressive system then a, for example, charitable deduction, favors the wealthy by definition. Is the path to a simpler, logical tax system more phase-outs or fewer?

Using the verb "favor" is misleading because how is it favorable to a person who pays $100,000 in taxes to deduct $10,000 in comparison to a person who pays $50,000 taking a $4,000 deduction? IS it more favorable to pay $46,000 in taxes or $90,000. We're not talking about what's right, moral or politically expedient, but the strict definition of favorable.

Posted by: guy in the veal calf office | Feb 28, 2008 2:22:15 PM