The mortgage interest deduction (MID) is one of the many tax laws currently being examined by our nation’s legislature, which makes now the perfect time to review just what the MID is and how it affects current and future Atlanta real estate residents.
The MID was originally created to encourage homeownership by helping families achieve the American dream of owning their own home through the reduction of homeowners’ taxable income by the amount of interest they have paid on their home loan during that year.
Data from the Internal Revenue Service (IRS) and Census Bureau has been used to both support and disagree with the MID. However, the National Association of Home Builders (NAHB) has had our own economists analyze the data to assess the validity of these claims.
Seventy percent of households with a mortgage claim the MID each year, and almost all homeowners benefit from the deduction at some point during the homeownership lifecycle. The argument that only a quarter of taxpayers would be affected is misleading because this does not take into account the lifecycle of homeownership. Of the two-thirds of households who own their own home, one-third of these own their own home without a mortgage. And, many of those with a mortgage who file a standard deduction instead of the MID do so because they are in the final stages of payment where they are paying greater amounts of principal and less interest. In the earlier stages of their mortgage, they more than likely were claiming the MID.
One of the biggest misconceptions concerning the MID is that the wealthy benefit the most from it. However, data from the Congressional Joint Committee on Taxation proves that this isn’t the case. In fact, 86 percent of households who benefit from MID have a combined income of less than $200,000 per year.
And, while many claim that repealing the MID would not affect individual households or the economy, almost all studies have found that eliminating it would reduce the demand for housing due to the increase in taxes for potential homebuyers. The reduction would also lower home values, contributing to a significant loss in wealth for current homeowners whose potential to find themselves in default or foreclosure would increase.
As an example, just a 1 percent decline in home prices would result in a loss of $185 billion on American households. A 6 percent decline would decrease household net worth by $1 trillion.
While many also believe that repealing the MID would make our tax code more progressive, the definition of a progressive tax system is one in which taxpayers with lower incomes pay a smaller share of their income relative to higher income earners. This means that repealing the MID would actually result in a larger percentage of income being lost to taxes by the middle class.
Fox example, for households with less than $200,000 in adjusted gross income (ADI), the typical MID is worth 1.76 of their AGI. For households with incomes greater than $200,000s, the tax benefit decreases to 1.5 percent of their AGI. So, if the MID was repealed, middle-class homeowners would face a larger tax hike as a share of their income.
Another common false belief is that the MID encourages buyers to purchase a larger home. This is a sensitive subject following our recent economic turmoil as many homeowners had received loans that were more than they could afford to pay back. But, while the MID can be connected with purchasing a larger home, evidence shows that the tax benefit generally reflects family size and therefore the housing demand. Larger families require a large home, which in turn means they are paying more in interest and receiving a larger tax benefit.
An NAHB analysis of IRS data confirms this theory. Taxpayers with two personal exemptions, a measure of family size, who claimed the MID had an average tax benefit of $1,500. Taxpayers with four personal exemptions averaged $1,950 in benefits.
Finally, while it may seem that renters would not support the MID, public opinion polling has found the MID to be popular with renters because many of them hope to one day become homeowners. If the MID was repealed, these would-be homeowners would most likely continue to rent instead of buying a home and boosting our economy.
At the end of the day, arguments can be made for and against the MID, but it is important to know the facts behind what it has done for homeowners in Atlanta and nationwide, and what the potential consequences of repealing it are.