Federal Tax Issues: An Overview

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Jed Smith, Managing Director, Quantitative Research
NATIONAL ASSOCIATION OF REALTORS®

North Carolina Real Estate Summit
Cary, North Carolina
July 16, 2013

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Federal Tax Issues: An Overview

  1. 1. Federal Tax Issues An Overview Jed Smith Managing Director, Quantitative Research NATIONAL ASSOCIATION OF REALTORS® North Carolina Real Estate Summit Embassy Suites, Cary, North Carolina July 16, 2013
  2. 2. Tax Reform—Blank Slate Remembering Senator Robert Byrd This Could be VERY Emotional: Who Wants to Volunteer? • Focusing on Credits, Exclusions, Deductions. – Legitimate Deductions to Stay. – Special Interests to Go. • Reducing Deficit and/or Tax Rates • Focus On – Promoting growth (jobs and standard of living); – Making the tax code fairer (progressive, equality); – Promoting Policy Objectives.
  3. 3. Focus on Major Tax Expenditures: $800 Billion Federal Deficit Estimated at $642 to $759 Billion for FY2013 • Grand total of Estimated Tax Expenditures: $1.2 trillion. – $151 Billion to businesses – $1.05 trillion to individuals • Major Tax Expenditures – Employee Health Care: $117.3 Billion – Dividends and Capital Gains: $146.2 Billion – Benefits: $148.6 Billion – Medical: $58.0 Billion – Charitable: $28.8 Billion – Child Credit: $56.8 Billion – EITC: $59 Billion – MID: $68.5 Billion – Property Tax: $24.5 Billion – Capital Gains: $22.3 Billion – State and Local Taxes: $43.5 Billion • Your Necessity is Someone Else’s Special Interest!
  4. 4. The Rationale for Mortgage Interest Deductibility Studies: Homeownership Promotes Communities • Foundations of Democracy: Social Stability, Prosperous and Informed Citizenry. • A Long History of Promoting Home Ownership. • Thomas Jefferson, FDR, and Subsequent Presidents. • Homeownership—Major Impact on Social Stability. • Homeownership Considered to be Highly Desirable. • Mortgage Interest Deduction: A Major Facilitator.
  5. 5. Why Advocate Home Ownership? Studies: Educational Achievement • Neighborhood Characteristics of Stable Housing Environment Facilitate Desirable Outcomes. • Staying in School. • Decreased Teenage Pregnancy. • Minimizing Bad Behavior. • Sense of Greater Responsibility by Entire Family—focus on home maintenance and financial skills. • Residential stability. • Impact on Younger Adults: Educational Attainment, Incomes, Welfare Independence. • Impact on Reading and Math Performance. • Educational Outcomes Strongly Influenced by Homeownership and Residential Stability.
  6. 6. Home Ownership Studies: Parenting and Civic Participation • Parental School involvement. – Frequency of reading to child. – Child’s participation in Organized Activities. – Screen Time (television and videogames). • Civic Participation. – Owners have a much greater financial stake in their neighborhoods than do renters. – Tend to remain in homes longer, stability to neighborhoods. – Tend to maintain residence—quality of surrounding community. – Participate in elections much more frequently than renters. – Volunteer more because they have a stake in the community. – Interactions with neighborhood much stronger.
  7. 7. Homeownership Studies: Socioeconomics and Crime • Socioeconomics. – Owners are happier and healthier than non- owners. – Perceptions of self esteem and life satisfaction higher. • Homeownership—Impact on Crime. – Homeowners have an incentive to deter crime. – Homeownership and public Assistance. – Property Maintenance and improvement.
  8. 8. Mortgage Interest Deductibility • Current: Interest paid on mortgage debt of up to $1 million: Principal residence, one additional residence plus up to $100,000 of debt on home equity loans. • Proposals for Change. – Limit itemized deductions to 28% for upper income tax payers. – Deficit Commission. • Repeal the MID in favor of lower tax rates. • (2) reduce the $1 million cap to $500,000. • (3) eliminate the deduction for second homes. • (4) convert the deduction to a 12% tax credit.
  9. 9. Mortgage Interest Deduction—Justified? • The mortgage interest deduction (MID) is a remarkably effective tool that facilitates homeownership. – While only about 30% to 35% of all taxpayers in any given year itemize their deductions, more than 70% of homeowners utilize the deduction over the lifecycle. – Eliminating the MID would cause a 15% decline in the value of homes across the nation. – Higher impact in high cost areas. – Bulk of deductions go to middle class. • Homeowners pay approximately 85 percent of income tax. – For many homeowners, the major deduction. – Homeownership key to middle class assets: basis for borrowing, retirement. – Given current structure of taxes, the right thing to do.
  10. 10. Other Tax Issues • Exclusion of gains on the sale of a principal residence. – Joint return--exclude up to $500,000 of gain. • Like-kind exchange rules. – Firmly fixed in the tax law for decades. – Permits the deferral of capital gains taxes, so long as the taxpayer satisfies numerous requirements and consummates both a sale and purchase within 180 days.
  11. 11. CONCLUSIONS • Federal Deficit an Important Issue. • Significant Disagreements in Congress Over Expenditures, Taxes, and Role of Government. • Compromise Has Not Been a Major Goal Recently. • Sweeping Changes Advocated. – Potential Disagreement Over Goals. – Major Changes Would Impact Major Stakeholders.

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