Tax Analysis of California and Maryland

Californians that claimed the mortgage interest rate deduction saved an average of almost $20,000 from their tax bill in 2008, according to a Tax Foundation analysis of new data from the Internal Revenue Service. Close behind were Hawaii and Nevada. The national average among the roughly one quarter of Americans who deducted mortgage interest from their taxes was $12,221.

But taxpayers in California benefited the most from taking advantage of the deduction. Californians who deducted mortgage interest saved an average of $18,876, several thousand dollars more than the typical Maryland homeowner who deducted mortgage interest on the 2008 federal income tax return. Folks who live in Maryland had the highest percent of tax returns claiming a mortgage interest deduction in 2008, according to fresh research from the Tax Foundation. Californians who deducted saved the most on their tax bill, an average deduction of nearly $20,000.

Overall, Maryland and California are the biggest winners. Maryland had the highest percentage of tax returns claiming the deduction, 37.9 percent, and average dollar amounts claimed were also high. It had the second-highest average deduction among all tax returns, $5,372, and counting only the tax returns that claim the mortgage interest deduction, the average Maryland tax return claimed $14,162 in mortgage interest. That is the fifth highest nationwide.

California had a lower percentage of tax returns claiming the deduction, but when Californians deduct mortgage interest, the amounts are high. Of California's 16.4 million tax returns, about three in ten deducted mortgage interest, 29.2 percent, 19th highest nationwide. But California ranked highest in average deduction among deducting returns, $18,876, and also highest among all returns, $5,520. Hawaii also ranked high, with its famously expensive homes, as did Nevada which has been growing so quickly that more of its home owners are in the early years of their mortgages when interest payments are high.

This analysis are a reminder of why the mortgage interest rate deduction, despite being assaulted by everyone from economists who say it distorts incentives in favor of home ownership to urban zealots who say it encourages sprawl, remains an untouchable tax break and a third rail of American politics.