Crthuky

In the USA experience:

I find the whole "mortgage interest deduction V. standard deduction" issue confusing.

Here's how I understand it:

1. Everyone gets a $24,000 deduction. Great so far.




2. If you like, you can instead take your mortgage interest as a deduction. (Obviously you would not do this unless that interest is $24,001 or more.)




3. The vast majority of folks in the US with a mortgage pay about $10,000 a year in interest - nowhere near the $24k point.




4. For rich people, your mortage interest is going to be more than $24,000. Let's say $50,000!




5. Et voila, rich people get an extra ($26,000 in the example) tax break.

My question is simply, do I understand the situation correctly?

Maybe there's another factor I don't know about?

Is the "Standard deduction V. mortgage interest deduction" issue simply a case of "a break for anyone with a pricey house"?

Thanks, colonial friends! :)

Note - of course there are a few obscure cases where folks have other, very large, deductions they can itemize, say, extremely large "tithe" charitable donations or whatever. I'm dismissing those cases. The overwhelming, normal, itemized deduction would be "mortgage interest."

1. Everyone gets a $24,000 deduction. Great so far.

Yes, the married filing jointly folk have a $24k standard deduction for 2018.

2. If you like, you can instead take your mortgage interest as a deduction. (Obviously you would not do this unless that interest is $24,001 or more.)

The other common itemized deduction is state and local taxes paid (SALT), but mortgage interest historically was the most common item that made itemizing deductions advantageous to people. New tax law capped this SALT deduction at $10k, which is very significant for even middle-class folks in some high-tax areas.

3. The vast majority of folks in the US with a mortgage pay about $10,000 a year in interest - nowhere near the $24k point.

Add in $10k in state and local taxes paid and some other itemized deductions and it gets a bit closer, but part of the intent of raising the standard deduction was to make itemizing less common, simplifying tax returns.

4. For rich people, your mortage interest is going to be more than $24,000. Let's say $50,000!

The deduction is only good for up to $750,000 in loan balance, so $50k is unreasonable, $30k would be about the first year's worth of interest on a $750k loan at 4%, so $50k could happen if they had a terrible rate, but the $750,000 limit puts a ceiling on this deduction.

5. Et voila, rich people get an extra ($26,000 in the example) tax break.

Yes, itemized deductions primarily benefit those with high income. However, tax deductions reduce the amount of income that is subjected to tax, so the benefit is a fraction of the all that money spent on interest/taxes/charity/etc. I'm not sure I'd call it an 'extra' tax break. Conversely, all those that have itemized deductions below the standard deduction benefit from a higher standard deduction, but I'm not sure I'd call that an extra tax break for them either. Regardless of what is perceived to be fair we also have a progressive tax rate which results in the highest income households paying more income tax (in general).

It is as simple as picking which one of the two is larger -

(1) Your standard deduction, or

(2) The sum of all your itemized deductions, taking SALT cap into consideration

Obviously you would not do this unless that interest is $24,001 or more.

Especially for taxpayers with a mortgage, it is very common to own a property (the one they have the mortgage for) - in which case they are able to deduct (a portion of) their real estate tax.

For example, if I have $9000 in state and local taxes deduction, it is only sufficient for my mortgage interest to exceed $15000 for me to prefer itemizing deductions.

However, in my opinion, your are right about mortgage interest deduction only making a difference for people with either large mortgages (expensive houses), or perhaps the ones with lots of other itemized deductions (e.g., high healthcare costs). This appears in alignment with one of the stated goals of TCJA, which was to increase the ratio of taxpayers preferring taking standard deduction over itemizing.