Is the Home Mortgage Interest Deduction Worthless to Most Americans?

In short, the answer is yes. If you understand how taxes work, you will see how for the average American family purchasing a home, there is $0 in tax savings for owning a home. That means that from an income taxes standpoint, contrary to what you may hear, the truth is that many people really have no tax savings benefits as a result of buying a personal residence.

First, let’s define the average American family for the purpose of this article. They file their tax returns as married filing jointly (MFJ) and they purchased an average-priced house of about $200,000. For the sake of simplicity, we'll estimate that the house has a $180,000 mortgage at 5.0% interest – meaning the family will pay $9,000 in interest expense per year – and pay property taxes of $2,000 per year on that house.

Note: Income taxes and tax savings/benefits vary based on your income, your filing status, your allowed deductions, whether or not you have to pay the Alternative Minimum Tax, etc. This means that while this article's illustration will probably apply to 85%-95% of Americans, it may not apply directly to you. Talk to a tax professional with specific questions related to your tax situation.

Now, when you file taxes each year, you fill out your IRS 1040 Form. You start with your salary or wages and use IRS-allowed deductions to reduce that amount as much as possible to get to a so-called Taxable Income. The amount of taxes you pay is based off that lower number: your Taxable Income.

One of the deductions that is allowed is the Standard Deduction or Itemized Deduction (you take one or the other, not both, and whichever is higher). Whichever you take is subtracted from your salary income, along with any other allowed deductions, to get that Taxable Income amount described in the previous paragraph.

The mortgage interest deduction is all the interest you pay for the year that goes onto your IRS Form Schedule A. For example, let’s say you have the $9,000 in interest above, plus the $2,000 property tax deduction noted for a total Schedule A of $11,000. That $11,000 is your total Itemized Deduction that you will take if it is above the Standard Deduction. Remember, you only take either the Standard or Itemized Deduction.

For a MFJ couple, the IRS allowed Standard Deduction is about $11,900 in 2012. So in this case, you’d take the Standard Deduction, not your Itemized Deduction calculation because the Standard Deduction is bigger.

But here’s the issue: Every MFJ taxpayer gets to take the Standard Deduction for free whether they own property or not. So since your Itemized Deduction isn’t above the Standard, which means you'll take the Standard instead of the Itemized anyway, there is no real tax benefit to owning property.

Now, if your interest and property taxes were $20,000 for the year, you’d take the Itemized Deduction. In this case, there would be a net tax savings for owning real estate.

But that isn’t the case for you with your $11,000 Itemized Deduction. This means that since the government gives you a higher "Standard Deduction" for free anyhow, the mortgage interest deduction doesn’t do anything for you, and that’s why it’s worthless to you.

To restate it: The IRS gives you a “Standard Deduction,” which most people use. Only if your total Schedule A Itemized Deductions are above the “Standard” would you “Itemize” your deductions. For the average American family who owns a home, they do not go above the Standard (or not above by much), so they use the Standard. The result is that there are no tax benefits for them for owning a home.

So who actually does get tax benefits from owning a home? People who buy much more expensive homes, with much larger interest deductions and property tax deductions. For the rest of us average folks with our homes in the $200,000 price range, we get zilch in terms of tax breaks!