Mortgages - Who Really Benefits From Interest Deductions REAL estate and building industry groups have loudly condemned proposals by both presidential campaigns to shrink the mortgage interest deduction. Central to their arguments is the long-hallowed deduction's value to the middle class. But a closer look at who benefits suggests that this perception, though prevalent, is not accurate. To begin with, most taxpayers do not benefit from the deduction at all. This is because they do not itemize deductions on their federal income tax returns. According to Joseph Rosenberg, a research associate at the Urban-Brookings Tax Policy Center, only about 30 percent of taxpayers itemize, rather than take the standard deduction. And the majority of these itemizers are upper-middle and upper-income households. Within that privileged category, the people who tend to derive the greatest dollar benefit from the mortgage interest deduction are households earning $100,000 to $500,000 a year. "About two-thirds of the total benefit go to that group in the 80th through the 99th income percentiles," Mr. Rosenberg said. For those households, by the center's calculations, the tax benefit of the deduction amounts to about 1.5 percent of after-tax income. By way of comparison, the value to households earning $40,000 to $50,000 is closer to 0.3 percent of after-tax income; for households earning $50,000 and $75,000, it is 0.7 percent. Why is this so? One reason is simply that people who have more money are more likely to have expensive homes and bigger mortgages. They may also have second homes, and under the current rules, mortgage interest may be deducted on those as well, up to a cap of $1 million in debt. The other factor is that the value of the subsidy increases along with your tax bracket. For households in the 15 percent bracket, the tax benefit for every $1,000 of mortgage interest deducted is $150. That benefit rises to $350 for households in the 35 percent tax bracket. Robert Dietz, an economist for the National Association of Home Builders, which opposes cuts in the deduction, points out that households earning up to $200,000 could still be considered middle class in some parts of the country. Taxpayers who benefit the most from the mortgage deduction tend to be concentrated in high-cost metropolitan areas. So although their income levels sound high relative to the rest of the nation's, the incomes reflect a higher cost of living. He also notes that much of the tax benefit is going to younger homeowners who are at the beginning of their mortgages, when interest charges are highest. "The largest mortgage interest deduction average was found for those ages 35 to 45 years," he said. But is the deduction helping them buy homes they wouldn't otherwise buy? "The theory is strong," Mr. Dietz said. By reducing the after-tax cost, you're increasing demand among potential home buyers. Mr. Rosenberg argues that the deduction does very little at the entry level. "The largest effect it has is it allows the upper middle class and upper income to buy larger houses and take out larger mortgages," he said. Interestingly, despite its concentrated effect, various surveys have shown broad public support for the mortgage deduction. This is possibly because, in part, "lots of people who don't itemize today may aspire to be itemizers in the future," said Jed Kolko, the chief economist for Trulia, a real estate listing Web site. That the deduction has been politically sacrosanct for so long reflects just how much it is prized by the itemizers of the moment, as well as those who are in the business of selling homes. "Policies that give concentrated benefits to a small number of people often survive better," Mr. Kolko said, "because the benefit is great enough to make them resist changes in it. They have an incentive to organize to protect that benefit.