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Home Owner Interactions with the Federal Income Tax System Presentation to National Association of Realtors® Research Committee New Orleans, LA November 6, 2010 Danielle Hale, Economist

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The National Association of Realtors

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Page 1: Homeowners & taxes

Home Owner Interactions with the Federal Income Tax System

Presentation to National Association of Realtors® Research

CommitteeNew Orleans, LA

November 6, 2010Danielle Hale, Economist

Page 2: Homeowners & taxes

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

RESEARCH

Page 3: Homeowners & taxes

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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Page 4: Homeowners & taxes

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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Page 5: Homeowners & taxes

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

Page 6: Homeowners & taxes

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

Page 7: Homeowners & taxes

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

RESEARCH

Sources: IRS 2008, NAR Research Estimate

Page 8: Homeowners & taxes

Average Mortgage Interest Deducted, by Age

Sources: IRS 2008, NAR Calculations

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Page 9: Homeowners & taxes

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

RESEARCH

Page 10: Homeowners & taxes

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

Page 11: Homeowners & taxes

Average Real Estate Taxes Deducted, by Age

RESEARCH

Sources: IRS 2008, NAR Calculations

Page 12: Homeowners & taxes

• 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

%?

Page 13: Homeowners & taxes

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.

Page 14: Homeowners & taxes

Appendix

Additional Charts/Data

Page 15: Homeowners & taxes

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

RESEARCH

Page 16: Homeowners & taxes

Annual Federal Deficits through 2020

Source: OMB

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Page 17: Homeowners & taxes

Net Federal Debt Outstanding

Source: OMB

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Page 18: Homeowners & taxes

Net Federal Revenue, by Source

Source: OMB

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Page 19: Homeowners & taxes

Net Federal Outlays, by Category

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Source: OMB

Page 20: Homeowners & taxes

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

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Source: OMB

Page 21: Homeowners & taxes

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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Page 22: Homeowners & taxes

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

RESEARCH

Source: CRFB from JCT

Page 23: Homeowners & taxes

Annual Federal Deficits 1941 through 1960

Source: OMB

RESEARCH

Page 24: Homeowners & taxes

Net Federal Debt Outstanding

Source: OMB

RESEARCH

Page 25: Homeowners & taxes

Net Federal Outlays by Category Over Time

RESEARCH

Source: OMB

Page 26: Homeowners & taxes

Mortgage Interest Deducted, by State

RESEARCH

Source: IRS 2008, NAR Calculations

Page 27: Homeowners & taxes

Mortgage Interest Deducted, by State

RESEARCH

Source: IRS 2008, NAR Calculations

Page 28: Homeowners & taxes

Real Estate Taxes Deducted, by State

RESEARCH

Source: IRS 2008, NAR Calculations

Page 29: Homeowners & taxes

Real Estate Taxes Deducted, by State

RESEARCH

Source: IRS 2008, NAR Calculations

Page 30: Homeowners & taxes

Home Ownership Rates by Age, 1995 - 2009

RESEARCH

Source: Census Housing Vacancy Survey

Page 31: Homeowners & taxes

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

RESEARCH

Source: Treasury, NAR Estimates

Page 32: Homeowners & taxes

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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