Home Owner Interaction with Federal Income Tax System

1,221 views

Published on

Published in: Real Estate, Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,221
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
10
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • As the mortgage is paid down, the amount of interest paid decreases. Assuming a constant property tax rate, annual property taxes will increase with the rate of home appreciation—let’s assume a modest 3 percent rate.
    7th year of ownership, mortgage interest paid is $8,959 and real estate taxes paid are $2,388 for total housing related deductions of $11,347.
  • 41.6 Million tax returns claimed a deduction for real estate taxes in 2008
  • Also by 2020, 80% of Federal spending will be on Social Security, Medicare, Medicaid, Defense, and Interest – Very difficult areas to cut
  • 2010 projection is 62.7 percent of GDP; Last time debt was that high was 1952 as debt was paid down following WWII. WWII peak was 108.7 percent of GDP. Current projections have debt at 77 percent of GDP in 2020, but other projections suggest that the level will be as high as 90% (William Gale) and rising.
  • In the last decade, Individual Income taxes have comprised between 43 and 50 percent of Net Federal Revenues. OMB projections for the next decade show the income tax growing to return to the 50 percent share.
  • 2009 Increase in Mandatory Outlays includes TARP, Jobs Initiative, Health Care Reform
  • “Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the "Budget Act") as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.” Estimates of Federal Tax Expenditures for Fiscal Years 2009 – 2013, Joint Committee on Taxation
    http://www.jct.gov/publications.html?func=startdown&id=3642
    http://online.wsj.com/article/SB10001424052748704518904575365450087744876.html – Feldstein on Tax Expenditures
    http://www.gao.gov/new.items/d05690.pdf - 2005 GAO report “Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined”
    http://www.house.gov/jec/fiscal/tax/expend.pdf - “TAX EXPENDITURES: A REVIEW AND ANALYSIS Vice Chairman Jim Saxton (R-NJ) Joint Economic Committee United States Congress August 1999”
    http://www.ctj.org/hid_ent/part-1/part1.htm
  • http://crfb.org/blogs/top-ten-tax-expenditures-jct-releases-its-annual-report
  • During WWII deficits were much larger as a share of GDP than they are today from 1942 to 1945 deficits were greater than 10 percent of GDP and as high as 30 percent of GDP in 1943.
  • Outstanding debt as a share of GDP was quite high, too.
  • Home Owner Interaction with Federal Income Tax System

    1. 1. 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
    2. 2. 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
    3. 3. 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
    4. 4. 2010 Standard Deductions and Marginal Tax Rates Filing 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
    5. 5. 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! $8,959 $2,388 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Years after home purchase Home Ownership Deductions: Mortgage Interest and Real Estate Taxes Paid Selected Year Mortgage Interest Paid Real Estate Taxes Paid Source: NAR Calculations
    6. 6. 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% Mortgage, but Don't Itemize, 12.5, 17% Owners by Filing Status Sources: Census, IRS 2008, NAR Research Estimate
    7. 7. 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 Sources: IRS 2008, NAR Research Estimate
    8. 8. Average Mortgage Interest Deducted, by Age $12,160 $8,799 $12,300 $13,829 $12,374 $11,099 $9,577 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 All returns 18 under 26 26 under 35 35 under 45 45 under 55 55 under 65 65 and over Sources: IRS 2008, NAR Calculations
    9. 9. 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
    10. 10. 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 Sources: IRS 2008, NAR Research Estimate
    11. 11. Average Real Estate Taxes Deducted, by Age $4,032 $1,998 $2,904 $3,856 $4,219 $4,298 $4,568 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 All returns 18 under 26 26 under 35 35 under 45 45 under 55 55 under 65 65 and over Sources: IRS 2008, NAR Calculations
    12. 12. • 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 Deducters Itemizing Non Owners Source: IRS 2007, NAR Calculations %?
    13. 13. 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 49 Was not aware of tax credit 2 1 3 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.
    14. 14. Appendix Additional Charts/Data
    15. 15. 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
    16. 16. Annual Federal Deficits through 2020 -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% -1.6 -1.4 -1.2 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Trillions Annual Surplus/Deficit (left axis) Share of GDP (right axis) Source: OMB
    17. 17. Net Federal Debt Outstanding 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0 2 4 6 8 10 12 14 16 18 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Trillions Debt Held by Public (left axis) Publicly Held Debt as % GDP (right axis) Source: OMB
    18. 18. Net Federal Revenue, by Source 44% 7% 42% 3% 1% 1% 2% 2009 Individual Income Tax Corporate Income Tax Social Insurance Taxes & Contribs Excise Taxes Estate and Gift Taxes Customs Miscellaneous 50% 10% 32% 3% 2% 1% 2% 2000 Source: OMB
    19. 19. Net Federal Outlays, by Category 34% 23% 11% 7% 13% 12% 2000 35% 19% 12% 7% 22% 5% 2009 Discretionary Outlays Mandatory Social Security Outlays Mandatory Medicare Outlays Mandatory Medicaid Outlays Other Mandatory Outlays Net Interest Outlays Source: OMB
    20. 20. 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 Source: OMB
    21. 21. 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
    22. 22. 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 Source: CRFB from JCT
    23. 23. Annual Federal Deficits 1941 through 1960 -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% -60 -50 -40 -30 -20 -10 0 10 20 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 Billions Annual Surplus/Deficit (left axis) Share of GDP (right axis) Source: OMB
    24. 24. Net Federal Debt Outstanding 0% 20% 40% 60% 80% 100% 120% 0 50 100 150 200 250 300 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 Billions Debt Held by Public (left axis) Publicly Held Debt as % GDP (right axis) Source: OMB
    25. 25. Net Federal Outlays by Category Over Time 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Net Interest Outlays Other Mandatory Outlays Mandatory Medicaid Outlays Mandatory Medicare Outlays Mandatory Social Security Outlays Discretionary Outlays Source: OMB
    26. 26. Mortgage Interest Deducted, by State $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 0% 5% 10% 15% 20% 25% 30% 35% 40% Maryland Connecticut Colorado Minnesota Virginia NewJersey Utah Oregon Delaware Massachusetts Arizona Georgia Washington RhodeIsland NewHampshire Wisconsin Nevada NorthCarolina California Idaho Illinois Michigan Ohio SouthCarolina Maine Percentage of Returns Claiming Deduction (left axis) Average Deduction (right axis) Source: IRS 2008, NAR Calculations
    27. 27. Mortgage Interest Deducted, by State $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 0% 5% 10% 15% 20% 25% 30% 35% 40% Missouri Pennsylvania Florida Vermont Kentucky Hawaii Alabama Indiana Kansas NewYork Montana Nebraska Alaska NewMexico Oklahoma Tennessee Texas Iowa Wyoming Arkansas Louisiana Mississippi WestVirginia SouthDakota NorthDakota Percentage of Returns Claiming Deduction (left axis) Average Deduction (right axis) Source: IRS 2008, NAR Calculations
    28. 28. Real Estate Taxes Deducted, by State $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% CONNECTICUT MARYLAND NEWJERSEY MINNESOTA MASSACHUSETTS VIRGINIA COLORADO OREGON UTAH RHODEISLAND NEWHAMPSHIRE WISCONSIN ARIZONA WASHINGTON DELAWARE GEORGIA ILLINOIS NORTHCAROLINA MICHIGAN IDAHO CALIFORNIA NEVADA MAINE OHIO VERMONT Share of Filers Deducting Real Estate Taxes Average RE Taxes Deducted by Claimants Source: IRS 2008, NAR Calculations
    29. 29. Real Estate Taxes Deducted, by State $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% MISSOURI SOUTHCAROLINA PENNSYLVANIA IOWA KANSAS MONTANA NEWYORK NEBRASKA FLORIDA KENTUCKY INDIANA HAWAII ALABAMA OKLAHOMA ALASKA NEWMEXICO TENNESSEE WYOMING TEXAS ARKANSAS MISSISSIPPI SOUTHDAKOTA NORTHDAKOTA LOUISIANA WESTVIRGINIA Share of Filers Deducting Real Estate Taxes Average RE Taxes Deducted by Claimants Source: IRS 2008, NAR Calculations
    30. 30. Home Ownership Rates by Age, 1995 - 2009 39.7 66.2 74.4 79.5 80.5 35 40 45 50 55 60 65 70 75 80 85 Under 35 35 to 44 45 to 54 55 to 64 65 and Over high low 2009 (rate labeled) Source: Census Housing Vacancy Survey
    31. 31. 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 areas 3 / NAR Estimated Eligible Buyers includes purchases through the end of February 2010 4 / NAR Estimated Eligible Buyers includes purchases from January 2009 to April 2010 5 / NAR aggregations of published Treasury data Source: Treasury, NAR Estimates
    32. 32. 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

    ×