Home Owner Interactions with the Federal Income Tax System

Presentation to National Association of Realtors® Research Committee

New Orleans, LANovember 6, 2010

Danielle 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

RESEARCH

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

RESEARCH

2010 Standard Deductions and Marginal Tax RatesFiling Status Standard Deduction*

Single $5,700

Head of Household $8,400

Married Joint $11,400

Married Separate $5,700

Filing Status 10% 15% 25% 28% 33% 35%

Single $0 $8,375 $34,000 $82,400 $171,850 $373,650

Head 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

RESEARCH

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!

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

$8,959

$2,388

Home Ownership Deductions: Mortgage Interest and Real

Estate Taxes Paid

Selected Year Mortgage Interest PaidReal Estate Taxes Paid

Years after home purchase

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.

Itemize; 38.5; 51%

Free and Clear, 24, 32%

Mort-gage, but Don't Itemize; 12.5; 17%

Owners by Filing Status

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

RESEARCH

Sources: IRS 2008, NAR Research Estimate

Average Mortgage Interest Deducted, by Age

All returns 18 under 26

26 under 35

35 under 45

45 under 55

55 under 65

65 and over$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$12,160

$8,799

$12,300 $13,829

$12,374 $11,099

$9,577

Sources: IRS 2008, NAR Calculations

RESEARCH

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

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

All returns 18 under 26 26 under 35 35 under 45 45 under 55 55 under 65 65 and over$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$4,032

$1,998

$2,904

$3,856 $4,219 $4,298

$4,568

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

$859,089,000, 77%

$203,623,543, 18%

$52,889,260, 5%

Federal Income Taxes and Share by Ownership Status

Owners Standard DeductersItemizing Non 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 20

Was 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

RESEARCH

Annual Federal Deficits through 2020

20012003

20052007

20092011

20132015

20172019

-1600000

-1400000

-1200000

-1000000

-800000

-600000

-400000

-200000

0

200000

400000

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

Annual Surplus/Deficit (left axis) Share of GDP (right axis)

Trill

ions

Source: OMB

RESEARCH

Net Federal Debt Outstanding

20012003

20052007

20092011

20132015

20172019

02000400060008000

100001200014000160001800020000

0%10%20%30%40%50%60%70%80%90%

Debt Held by Public (left axis)Publicly Held Debt as % GDP (right axis)

Trill

ions

Source: OMB

RESEARCH

Net Federal Revenue, by Source

43%

7%

42%

3% 1%1%2%

2009

Individual Income TaxCorporate Income TaxSocial Insurance Taxes & ContribsExcise Taxes Estate and Gift TaxesCustomsMiscellaneous

50%

10%

32%

3% 1%1%2%

2000

Source: OMB

RESEARCH

Net Federal Outlays, by Category

34%

23%

11%

7%

13%

12%

2000

35%

19%12%

7%

22%

5%

2009

Discretionary OutlaysMandatory Social Se-curity OutlaysMandatory Medicare OutlaysMandatory Medicaid OutlaysOther Mandatory Out-laysNet Interest Outlays

RESEARCH

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

RESEARCH

Largest Tax ExpendituresTop 10 Tax Expenditures 2009 – 2013 (billions) Avg

Deduction of mortgage interest on owner-occupied homes $573 $115Exclusion 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

Annual Federal Deficits 1941 through 1960

19411943

19451947

19491951

19531955

19571959

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Annual Surplus/Deficit (left axis) Share of GDP (right axis)

Billi

ons

Source: OMB

RESEARCH

Net Federal Debt Outstanding

19411943

19451947

19491951

19531955

19571959

0

50

100

150

200

250

300

0%

20%

40%

60%

80%

100%

120%

Debt Held by Public (left axis)Publicly Held Debt as % GDP (right axis)

Billi

ons

Source: OMB

RESEARCH

Net Federal Outlays by Category Over Time

20002002

20042006

20082010

20122014

20162018

20200%

10%20%30%40%50%60%70%80%90%

100%

Net Interest OutlaysOther Mandatory OutlaysMandatory Medicaid OutlaysMandatory Medicare OutlaysMandatory Social Security OutlaysDiscretionary Outlays

RESEARCH

Source: OMB

Mortgage Interest Deducted, by State

Mary

land

Colorado

Virginia

Utah

Delaware

Arizona

Wash

ington

New Hampsh

ire

Nevada

Californ

ia

Illinois

OhioM

aine

0%5%

10%15%20%25%30%35%40%

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000

Percentage of Returns Claiming Deduction (left axis)Average Deduction (right axis)

RESEARCH

Source: IRS 2008, NAR Calculations

Mortgage Interest Deducted, by State

Miss

ouri

Florid

a

Kentuck

y

Alabam

a

Kansas

Montan

aAlas

ka

Oklahoma

Texas

Wyo

ming

Louisi

ana

West

Virginia

North Dak

ota0%5%

10%15%20%25%30%35%40%

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000

Percentage of Returns Claiming Deduction (left axis)Average Deduction (right axis)

RESEARCH

Source: IRS 2008, NAR Calculations

Real Estate Taxes Deducted, by State

RESEARCH

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Share of Filers Deducting Real Estate Taxes Average RE Taxes Deducted by Claimants

Source: IRS 2008, NAR Calculations

Real Estate Taxes Deducted, by State

RESEARCH

MISSOURI

PENNSYLV

ANIA

KANSAS

NEW YORK

FLORIDA

INDIANA

ALABAMA

ALASK

A

TENNESSEE

TEXAS

MISSISS

IPPI

NORTH DAKOTA

WEST

VIRGINIA

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Share of Filers Deducting Real Estate Taxes Average RE Taxes Deducted by Claimants

Source: IRS 2008, NAR Calculations

Home Ownership Rates by Age, 1995 - 2009

Under 35 35 to 44 45 to 54 55 to 64 65 and Over3540455055606570758085

2009 (rate labeled)

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

RESEARCH

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

RESEARCH