5 States Where Residents Claim the Highest Mortgage Interest Deductions

The mortgage interest deduction represents the second-biggest tax break Americans benefit from. Here are five states whose residents are benefiting the most.

Feb 23, 2014 at 10:31AM

This might be a difficult figure to stomach, but we are just 52 days away from the tax filing deadline of April 15, including today.

For many of us, tax time represents an arduous, time-consuming struggle between finding our receipts and managing what appears to be an almost biblical number of pages and changes in the U.S. tax code. Thankfully, tax-prepping software from the likes of Intuit, H&R Block, and Blucora are making it easier for consumers to do their own taxes without the assistance (and higher price) of a tax professional.

In reality, tax time should be a welcome time for most Americans, with better than 80% of filers getting some form of refund from the U.S. government. Even for those who aren't getting a refund, getting the most out of a number of deductions and tax credits is the crucial formula to owing less.

Home Construction

Source: Wonderlane, Flickr.

According to a 2011 report from U.S. News, the second-largest tax break that individuals get behind only not having to count employer-paid medical costs in their gross income tabulations is the mortgage interest deduction. There are quite a few stipulations as to who qualifies for the mortgage interest deduction and who doesn't -- and it clearly shows with only about one-third of tax filers claiming the deduction. However, if you do qualify for this highly coveted deduction, you should be thrilled since the U.S. average deduction per filer was $2,462 in 2011 according to research by The Pew Charitable Trusts using data from the IRS.

Residents in these five states could be looking at big tax deductions this year
Let's have a look, based on Pew's data, at five states where filers have received the biggest mortgage interest deductions, and examine some of the requirements you need to meet to be able to claim this coveted deduction for yourself. 

Five states with the highest average mortgage interest deduction per filer:


Average Mortgage Interest Deduction Per Filer











Source: Analysis of IRS data from 2011 by The Pew Charitable Trusts.

There are a number of factors at work here that allow residents in these five states to deduct so much more than the national average of $2,462.

In many cases the price of homes in these states is higher than the national average. Higher-priced homes have bigger mortgages, and thus a larger amount of interest that can be deducted. In 2011, for example, which is when Pew cultivated its data, California ranked fifth, Connecticut seventh, Colorado eighth, Maryland ninth, and Virginia 15th in average home price in the United States.

Another major factor at work here is the willingness of taxpayers to itemize their returns and claim the mortgage interest deduction. The big impetus appears to be higher state and local taxes, which can be at least partially offset by claiming this deduction. In terms of state income taxes, Maryland, Colorado, Virginia, and Connecticut are right around the national average, but Californians get absolutely manhandled with more than double the average state income tax rate at 13.3%. If I were still a Californian myself, that alone would certainly be enough for me to itemize and bask in the mortgage interest deduction if I qualified.

Taxes Calculator

Source: Stockmonkeys.com, Flickr.

Things you need to know about the mortgage interest deduction
With only a third of tax filers claiming this deduction, you've likely surmised that not everyone can utilize it. Let's go through some of the basics as to of who qualifies for this often mammoth deduction so you'll be prepared this tax season.

Possibly the most important thing taxpayers should understand is what actually qualifies as "mortgage interest." According to the IRS, a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan (i.e., all debts secured on your home) are what you can claim under the mortgage interest deduction. Furthermore, you can only claim this interest on your main home or a second home, not on any additional properties. So interest on personal loans and third properties etc. simply aren't tax-deductible.

Secondly, there are limitations on the amount you can deduct. If you suddenly fall into Warren Buffett-like wealth, you can't purchase a $100 million mansion, finance it, and claim the mortgage interest on it. The IRS limits your deduction to $1 million to buy, construct, or improve your primary home, or second home. The IRS also allows you to deduct interest on up to $100,000 in home equity debt.

Now, if you're one of a number of Americans with more than one property, there are a few key things you should be aware of. For one, you can actually switch which property you view as your second home from year to year if it helps your tax situation. In other words, if refinancing a loan brought your mortgage interest paid way down on house No. 2, you could, if you owned a third home, use house No. 3 as your second-home for mortgage interest deduction in the upcoming year and exclude house No. 2. Next year, if the situation reversed again, you could switch back for tax reporting purposes.

Also, if you rent out a second home, you have to live there for more than 14 days in a year, or more than 10% of the number of days you rented it out for, whichever is greater; otherwise it's considered a rental property and not a second home, and will be accounted for in a different manner on your taxes.

And one final thing to mention since we're talking about mortgages -- the points you pay when you originate or refinance your mortgage are deductible on an amortized basis over the time frame of the loan. It's often not a huge sum of savings, but it's certainly better than nothing, so don't forget about it if you paid any points to obtain your financing.

Is Uncle Sam about to claim 40% of your hard-earned assets?
Thanks to a 2013 law called the American Taxpayer Relief Act, or ATRA, he can, and will, if you aren't properly prepared.

Fortunately, The Motley Fool recently uncovered an arsenal of little-known loopholes to protect yourself from ATRA and help keep the taxman at bay when he inevitably comes calling. We reveal them all in a brand-new special report. Simply click the following link below for instant, 100% free access.

Protect my hard-earned wealth from Uncle Sam

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers