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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 all the 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).

Yes, you understand it correctly. Here's what changed.

And by the way, it's a $12,000 standard deduction. You are thinking "married filing jointly", which is two people's tax form, and the numbers all double.

In 2017, the government gave exemptions of $4050 per dependent (including yourself) on line 42. And separately from that, they gave a standard deduction of $6350 on line 40.

So, in 2017, the deductions on Schedule A (such as mortgage, state income tax, health and charitable deductions) became effective at only $6351, a perfectly achievable number for a huge number of Americans. (Downside: paperwork).

In 2018 they did two things. First, they bumped the standard deduction by $1600, to $7950. That's pure win for taxpayers. Then, they eliminated the exemption for yourself and effectively moved it inside the standard deduction, raising the standard dedution to $12,000.

It's a win if your itemized deductions were less than $7,951, because you just got a free bump in the standard deduction.

• For instance your itemized deductions were $2000. Old way, you deduct $6350 + $4050, or $10,400. Now, you deduct $12,000.


• For instance your itemized deductions were $7000. Old way, you deduct $7000 + $4050, or $11,050. Now, you deduct $12,000.

However if your itemized deductions were $7,951 and above, it is a net lose because you lost your exemption.

• For instance your itemized deductions were $10,000. Old way, you deduct $10,000 + $4050, or $14,050. Now, you deduct $12,000.


• For instance your itemized deductions were $30,000. Old way, you deduct $30,000 + $4050, or $34,050. Now, you deduct $30,000.

So yes. This puts itemized deductions out of reach for many Americans who could take it before (all with a $6351-$12,000 itemization). It's mostly a lose for those who itemized before, unless they are in that $6351-7949 happy zone.

It's also a lose for public charities, because the tax incentive to donate is gone for many Americans.

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.

I have a bunch of tax accountants in my family and we had this conversation the other day. They'll be the first to tell you that no, itemizing deductions is not just for the wealthy. You're unlikely to see it in the lower income brackets, but lots of middle-class taxpayers benefit from it as well.

To answer your question strictly as written, yes, it's unlikely that a middle-income person would want to itemize based on mortgage interest and nothing else. However: it's important to note that while mortgage interest is indeed the largest single deduction for many taxpayers, it's typically not so large that you can ignore the other types of deductions. After all, you're comparing the sum total of all of your deductions to the standard deduction amount. If you live in a high-tax state, you can deduct up to $10k for sales/income/property taxes at the state/local level. That's more than 40% of the standard deduction amount right there, and it's not an unreasonable number in some locales. Add the $10k average mortgage interest payment you mentioned and you're up to $20k. Scraping together another $4001 of deductions from charitable contributions and other sources isn't unreasonable. Certain one-off events can qualify for large deductions as well, such as large medical expenses, losses due to a natural disaster, or certain costs related to selling a home.

Also, be aware that some states with income taxes will only let you itemize your state return if you also itemized your federal return. In some cases, the amount you save in state taxes by itemizing can exceed the amount you might lose in federal taxes for itemizing and deducting less than the standard deduction.