Mortgage interest rates more than doubled over the past two years, and have been above 6% for more than 18 months. Historically, many taxpayers could find relief in the mortgage interest deduction, but that’s not as frequently the case due to the Tax Cuts and Jobs Act (TCJA).

There are two ways for Americans to calculate their tax deductions, and they’re allowed to select the option that minimizes their tax burden. They can either take a “standard deduction” which discounts their taxable income by a fixed amount based on their filing status, or they can “itemize” and offset their taxable income with a series of applicable deductions based on expenses they’ve paid. The mortgage interest deduction is one of several popular and lucrative itemized deductions, making up about 23% of total itemized deductions taken in 2016.

The taxpayer impact

In 2017 before the tax cuts, the standard deduction was $6,350 for single filers and $12,700 for married filers. According to the Tax Policy Center, roughly 70% of taxpayers used the standard deduction, with 30% itemizing their taxes due to favorable conditions. The tax cuts nearly doubled the standard deduction to $12,000 for single filers and $24,000 for married filers. As a result, just over 11% of taxpayers itemized the following year.

In 2022, a year in which mortgage rates climbed above 7%, less than 10% of taxpayers itemized. It’s hard to say how many would have itemized before the tax cuts, but it’s possible the rate could have climbed above 40%.

That’s not to say that taxes overall are higher, but the benefits of homeownership are more muted, if not outright eliminated. Whether or not this is a net positive is a matter of perspective.

The economic impact

From a policy perspective, the case for mortgage interest deductions isn’t particularly strong. The reality is that the deduction costs the Federal government billions every year – even after the tax cuts – while comparatively benefitting wealthiest families the most historically. The intent of the deduction originally was to boost homeownership, but researchers have suggested that it lacks a measurable impact and is “a particularly poor instrument for encouraging homeownership because it is targeted at the wealthy, who are almost always homeowners.”

From a commercial standpoint, mortgages have long been a meaningful source of income for underwriters and banks. Existing home sales are at a 10-year low and are on-par with 1990s levels despite a population that’s about one-third larger.

When one door closes, another opens

The good news for banks is that while tax policy and high interest rates are subduing new mortgages – historically one of their most lucrative revenue channels – taxes have also emerged as their key to growth. april’s AI-powered embedded tax suite is enabling leading fintechs, banks, and payroll providers to tap into the $300B annual refund market, an amount buoyed by the increased standard deduction. At institutions that embed april’s tax filing experience, an average of 95% of users deposited their tax refund into the recommended account, leading to tens of millions in increased liquidity. 

Beyond increased liquidity, embedded taxes are also a gold mine of data about consumers that can help banks better personalize offers, cross-sell solutions, and deliver optimized product experiences.