Question

Discuss tax benefits from the mortgage subsidy for different income groups. Discuss how the tax benefit increases with income

Answer 1

TAX BENIFITS FROM THE MORTAGAGE SUBSIDY FOR DIFFERENT INCOME GROUPS ARE -

• First, to claim the mortgage interest deduction, taxpayers must itemize when filing federal tax returns, rather than taking the standard deduction. Because of the progressive nature of the federal income tax, the value of itemized deductions rises as income rises. Those facing the highest marginal tax rates—high-income taxpayers—receive a much more powerful tax benefit from tax deductions than low-income taxpayers receive. As a result, low-income taxpayers are less likely to itemize, placing the benefits of the home mortgage interest deduction out of reach. This factor is enhanced by the gradual elimination of the phase-out on itemized deductions—known as the “Pease provision”—that currently limits the amount of itemized deductions high-income individuals can claim.
• Second, low-income taxpayers tend not to own homes, especially those who are younger and live in urban areas. Additionally, many low-income retirees tend to have less interest outstanding on home loans—i.e., their home mortgages are “paid off”—and rely primarily on Social Security income which is not included in AGI. This reduces the tax benefit of the home mortgage interest deduction to them.
• Third, high-income earners tend to have more valuable homes. In general the greater the home value, the greater the interest payment on the associated mortgage. As a result, the President’s Advisory Panel on Federal Tax Reform has criticized the home mortgage interest deduction for primarily encouraging the construction of larger homes, and not necessarily broadening home ownership among middle-income.

TAX BENIFIT INCREASES WITH INCOME-

EITCs reduce the tax liability of qualifying taxpayers in an amount determined mostly by their income level, marital status and number of dependent children.The amount of EITC depends on a recipient’s income, marital status, and number of children. As the figure shows, workers receive the credit beginning with their first dollar of earned income; the amount of the credit rises with earned income until it reaches a maximum level and then begins to phase out at higher income levels (see the table at the end of this piece for how the EITC is calculated). The EITC is “refundable,” which means that if it exceeds a low-wage worker’s income tax liability, the IRS will refund the balance.

Tax benefits provide an advantage to the taxpayer while typically benefiting another entity. An example of a tax benefit is an energy tax credit; taxpayers can qualify for certain tax credits for installing energy efficient systems in their homes, which benefits the environment while reducing the demand for fuel. Quite often tax benefits may be only available for a certain time period or tax year.

Tax benefits come in the form of deductions, credits, and exclusions, each of which has a different structure and a different effect on individual income tax liabilities.

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