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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information