December 13, 2012

The mortgage interest deduction, which lowers the tax bill of mortgage holders, has long been seen as an incentive that helps more Americans afford homes. But is it actually working?

It’s an important question, since the government spends $108 billion a year on this one deduction. With lawmakers mulling fighting over ways to cut spending and raise revenue as the fiscal cliff approaches, it could make a juicy target.

Especially in light of the fact that the people who need the most help affording homes aren’t actually helped by this deduction. 75% of the benefit of the deduction goes to the top 20% of income earners, according to The Atlantic. People who earn over $200,000 get an average benefit of $2,221 for deducting their mortgage interest. Meanwhile, those who make under $30,000 get zero benefit. A typical household that earns between $50,000 and $70,000 gets an average of just $179 in reduced taxes.

The way it works now, the more you earn, the larger the house you can afford, the bigger the mortgage–and interest deduction–you can take. (That’s one reason this couple cites for their high taxes–they don’t own a home and don’t get the mortgage interest deduction.) Plus, you can only take the deduction if you itemize your tax return, and low earners don’t.

The mortgage interest deduction also disproportionately benefits certain metropolitan areas–San Francisco and San Jose in California, Bridgeport in Connecticut and Suffolk County-Nassau County in New York (A.K.A. Long Island) top the list of wealthy areas that rake in the mortgage deductions every year.

Given these stats, it seems like the mortgage interest deduction isn’t a way to help Americans achieve their dream of owning a home, but just another loophole that benefits the wealthy–a hot topic this year.