homeowners & taxes
DESCRIPTION
The National Association of RealtorsTRANSCRIPT
Home Owner Interactions with the Federal Income Tax System
Presentation to National Association of Realtors® Research
CommitteeNew Orleans, LA
November 6, 2010Danielle Hale, Economist
Facts on Home Owners and the Federal Income Tax System
• There are 75 million home owners among 112 million households in the U.S.
• Home owners can typically deduct mortgage interest, state and local real estate taxes, and exclude a portion of capital gains on the sale of their residence.
• In 2007, 143 million tax returns were filed. Of these, 45.5 million included a deduction for mortgage interest OR real estate taxes.
• Home owners pay 80 to 90 percent of Federal Individual Income Taxes.
• Among the age groups, 35 to 44 year olds have the largest average mortgage interest deduction while those 65 and older have the largest average real estate taxes deduction.
Sources: Census, IRS, NAR Research Estimate
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How are Tax Benefits Determined?
• Home owner pays mortgage interest and real estate taxes that can be itemized as deductions, reducing the owner’s amount of taxable income
• If the home owner has enough total deductions (MID, Real Estate Taxes, State and Local Income/Sales Taxes, Charitable Contributions, Medical Expenses, etc.) to exceed standard deduction for filing status and itemizes:
Tax Savings = Deductions * Marginal Tax Rate
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2010 Standard Deductions and Marginal Tax Rates
Filing Status Standard Deduction*
Single $5,700Head of Household $8,400Married Joint $11,400Married Separate $5,700
Filing Status 10% 15% 25% 28% 33% 35%
Single $0 $8,375 $34,000 $82,400 $171,850 $373,650Head of Household
$0$11,950
$45,550 $117,650 $190,550 $373,650
Married Joint$0
$16,750
$68,000 $137,300 $209,250 $373,650
Married Separate
$0 $8,375 $34,000 $68,650 $104,625 $186,825
Source: Tax Policy Center 2010 Projection
*Additional Standard Deduction Available for Elderly and Blind
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What Might an Owner Deduct?
• $200,000 home purchased with 10% down payment , 5.5 percent mortgage interest rate
• Monthly payment = $1,022 for principle and interest
• Interest paid is $825/month or $9,900 during the first year.
• Property taxes of 1 percent add another $167/month or $2,000 per year in the first year
• First-year home-related deductions are $11,900!
RESEARCH
Source: NAR Calculations
About the Mortgage Interest Deduction (MID)
• 38.5 million individual income tax filers claimed a mortgage interest deduction (MID) in 2008
• Of the 75 million home owners, about 32 percent own their homes outright, they have no mortgage.
Sources: Census, IRS 2008, NAR Research Estimate
RESEARCH
Mortgage Interest Deducted, by State
States by Share of Returns Claiming Deductions
1 Maryland 38%2 Connecticut 35%3 Colorado 35%4 Minnesota 34%5 Virginia 34%
46 Louisiana 19%47 Mississippi 18%48 West
Virginia 15%49 South
Dakota 15%50 North
Dakota 15%
States by Size of Avg Deduction
1 California $18,876 2 Hawaii $16,730 3 Nevada $15,502 4 Washington $14,262 5 Maryland $14,162
46 Kentucky $8,345 47 Mississippi $8,301 48 Nebraska $8,233 49 Iowa $8,104 50 Oklahoma $7,992
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Sources: IRS 2008, NAR Research Estimate
Average Mortgage Interest Deducted, by Age
Sources: IRS 2008, NAR Calculations
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About the Real Estate Tax Deduction
• In 2008, 29.3 percent of individual income tax filers claimed a deduction for real estate taxes
• This is a larger share than the 26.8 percent (38.5 million) who claimed the MID
• 41.6 million tax returns claimed a deduction for real estate taxes in 2008
Sources: Census, IRS 2008, NAR Research Estimate
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Real Estate Taxes Deducted, by State
States by Share of Returns Claiming Deductions
1 Connecticut 41%
2 Maryland 41%
3 New Jersey 39%
4 Minnesota 38%
5 Massachusetts
36%
46 Mississippi 20%
47 South Dakota
17%
48 North Dakota
17%
49 Louisiana 17%
50 West Virginia 17%
States by Size of Avg Deduction
1 New Jersey $7,918
2 New York $7,103
3 Connecticut $6,293
4 New Hampshire
$6,146
5 Illinois $5,473
46 South Carolina $1,665
47 Mississippi $1,591
48 Arkansas $1,406
49 West Virginia $1,282
50 Alabama $1,269
RESEARCH
Sources: IRS 2008, NAR Research Estimate
Average Real Estate Taxes Deducted, by Age
RESEARCH
Sources: IRS 2008, NAR Calculations
• Some home owners do not itemize.
• NAR estimates that these 12 million owners pay between 5 and 11 percent of all income taxes.
Home Owner Tax Share and Non-Itemizing Home Owners
RESEARCH
Source: IRS 2007, NAR Calculations
%?
Temporary Tax Measure: The First-time Home Buyer Tax Credit
All Buyers
First-time Buyers
Repeat
Buyers
Used tax credit 71% 93% 48%Did not qualify for tax credit 27 6 49Was not aware of tax credit 2 1 3
RESEARCH
Source: 2010 NAR Profile of Home Buyers and Sellers
Before Nov 2009
After Nov 2009
Used tax credit 58% 79%Did not qualify for tax credit 40 20Was not aware of tax credit 2 2
• The 2010 Profile of Home Buyers and Sellers has new results on the First-time Home Buyer Tax Credit.
• Nearly 80 percent of home buyers who closed in November 2009 or later used the tax credit.
Appendix
Additional Charts/Data
Debt and Deficits
• Individual Comparison– Debt = Total money owed– Deficit = Annual Spending Exceeds Income for
fixed period
• What results from deficits and debt?– Individual– Country
• Evidence that debt above 90 percent reduces growth (Reinhart and Rogoff)
• Other rules of thumb suggest that deficits raise interest rates and reduce growth
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Annual Federal Deficits through 2020
Source: OMB
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Net Federal Debt Outstanding
Source: OMB
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Net Federal Revenue, by Source
Source: OMB
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Net Federal Outlays, by Category
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Source: OMB
Ok, we have a Fiscal Problem. Where to cut?
• Mandatory Spending (53% in 2000; 60% in 2009): – Social Security, Medicare/Medicaid
• Discretionary Spending (34% in 2000; 35% in 2009):– Defense, Homeland Security, Commerce, Education
• Tax Expenditures:– Reduction in income tax liability as a result of special
tax provisions or regulations to particular taxpayers– Revenue losses due to special exclusion, exemption, or
deduction from gross income or special credit, preferential rate of tax, or deferral of tax liability
RESEARCH
Source: OMB
Tax Expenditures – Controversy?• The tax expenditure concept relies heavily on a normative notion
that shielding certain taxpayer income from taxation deprives government of its rightful revenues. This view is inconsistent with the proposition that income belongs to the taxpayers and that tax liability is determined through the democratic process, not through arbitrary, bureaucratic assumptions. 1999 JEC Report for Representative Jim Saxton (R-NJ)
• “In some cases, however, an item listed as a tax expenditure may not really be a subsidy. Instead, it might be defensible on pure tax policy grounds as a proper adjustment in computing ability to pay taxes.” Citizens for Tax Justice
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Largest Tax Expenditures
Top 10 Tax Expenditures 2009 – 2013 (billions) Avg
Deduction of mortgage interest on owner-occupied homes
$573
$115
Exclusion of employer contributions for health care, health insurance premiums
$568 $114
Exclusion of pension contribution and earnings $533 $107
Reduced rates of tax on dividends and long-term capital gains
$419
$84
Exclusion of Medicare benefits $317 $63
Earned income credit $261 $52
Deduction of state and local taxes $250
$50
Deduction for charitable contributions $184 $37
Child tax credit $160 $32
Exclusion of capital gains at death $159 $32
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Source: CRFB from JCT
Annual Federal Deficits 1941 through 1960
Source: OMB
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Net Federal Debt Outstanding
Source: OMB
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Net Federal Outlays by Category Over Time
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Source: OMB
Mortgage Interest Deducted, by State
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Source: IRS 2008, NAR Calculations
Mortgage Interest Deducted, by State
RESEARCH
Source: IRS 2008, NAR Calculations
Real Estate Taxes Deducted, by State
RESEARCH
Source: IRS 2008, NAR Calculations
Real Estate Taxes Deducted, by State
RESEARCH
Source: IRS 2008, NAR Calculations
Home Ownership Rates by Age, 1995 - 2009
RESEARCH
Source: Census Housing Vacancy Survey
Treasury and NAR Estimates of First-time Home Buyer Tax Credit Usage
First Time Homebuyer Credit for Houses Purchased in 2009 - Number of Filers 1, 5 /
First Time Homebuyer Credit for Houses Purchased in 2009 - Sum of Credits Claimed 1, 5/
First Time Homebuyer Credit for Houses Purchased in 2009 - NAR Estimated Eligible Buyers 2, 3 /
First Time Homebuyer Credit for Houses Purchased to Date - NAR Estimated Eligible Buyers 2, 4 /
NORTHEAST 222,967 $1,603,737,508 575,159 639,805
SOUTH 684,314 $4,981,998,002 1,445,958 1,606,844
MIDWEST 386,087 $2,695,982,104 919,278 1,021,790
WEST 404,335 $3,024,271,352 855,545 951,481
OTHER 850 $6,466,598 not estimated not estimated
TOTALS 1,698,553 $12,312,455,564 3,887,109 4,322,094
1 / First Time Homebuyer Credits as of May 29, 2010.(Copied from source: http://treasury.gov/recovery/docs/Treasury%20Recovery%20Act%20Data%20as%20of%207-31-2010.xls).2 / Sum of states is not equal to US total due to non-estimated areas3 / NAR Estimated Eligible Buyers includes purchases through the end of February 20104 / NAR Estimated Eligible Buyers includes purchases from January 2009 to April 20105 / NAR aggregations of published Treasury data
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Source: Treasury, NAR Estimates
Other Resources
• Facebook: http://www.facebook.com/pages/NAR-Research/73888294183
• Twitter:http://twitter.com/NAR_Research
• Website:http://www.realtor.org/research
• MID Benefit/Buying Power Calculator:Available on iTunes
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