Unlike other itemized deductions, the total benefits of housing-related deductions such as the mortgage interest deduction, generally decline in value as individuals age. This important fact demonstrates that the mortgage interest deduction’s most important beneficiaries are younger households, who typically have large mortgages, small amounts of equity in their homes, and growing families. Further, this fact runs counter to the often-heard claim that the mortgage interest deduction almost exclusively benefits high-income households.
The analysis in this paper supplements previous NAHB research regarding housing tax incentives, including exploring the problems with government methods, measuring the size of the housing tax expenditures  and reexamining the income distribution of the mortgage interest and real estate tax deductions. 
The Age Distribution of Taxpayers
Recently released Statistics of Income (SOI) data from the Internal Revenue Service (IRS) provide analysts the ability to examine the age of taxpayers reporting various tax items, including taxable income and certain itemized deductions. These data are based on samples of income tax returns. The age reported in the sample is the age of the taxpayer, and in cases of joint/married returns, the age of the primary taxpayer. While these data do not match exactly with non-tax concepts such as head-of-household, they do provide a useful proxy for examining the tax benefits of housing. The data used in this paper are 2007 SOI data, the most recent available.
Figure 1 reports the overall age distribution of itemizing taxpayers above the age of 18. Taxpayers under the age of 18 make up 1.1% of the total (2.2% of all returns, itemizing and non-itemizing). However, for the purposes of this article, these younger taxpayers are excluded. Such taxpayers are unlikely to be making housing purchase/rent decisions and in many cases represent children of wealthy families. 
The data demonstrate that taxpayers with ages ranging from above 34 to under 55 make up the majority of those filing income tax returns with itemized deductions (51%). It is worth noting the difference in the distribution by age of itemized returns compared to same distribution for all taxpayers (itemizers and non-itemizers), which is illustrated in Figure 2. The primary contrast is the difference in shares of taxpayers aged 18 to 35 who itemize (15% of the total) and the total (34%). Given that one of the most important reasons taxpayers begin to itemize deduction is homeownership status, this concentration of non-itemizers in the 18 to 35 grouping is not surprising. Figures 1 and 2 demonstrate that itemizing taxpayers tend to be middle-aged, when lifetime incomes tend to peak and potential itemized expenses are growing.
Figure 3 presents aggregate adjusted gross income (AGI) for itemizing taxpayers by age class. The statistics are roughly comparable to Figure 1. However the AGI shares for those 45 and older exceed their share of the population, which is consistent this age class being at the peak of their earning potential. The share of total AGI by age class is about 7% higher for those 45 to 55, 10% higher for those 55 to 65, and 14% higher for those 65 and above. Keep in mind however, that these data only reflect income reported for tax purposes. Many low-income seniors do not file taxes at all, and thus this AGI income distribution by age class is only representative for tax filers with itemized returns.
Again, contrast this distribution for itemizing taxpayers relative to the set of all tax filers, as illustrated in Figure 4. The differences for AGI shares are smaller than the differences of counts of taxpayers (as seen in Figures 1 and 2), but as before the share of AGI due to the age class of 18 to 35 is smaller among the set of itemizing taxpayers (10%) than is the share of AGI for this age group among all taxpayers (16%).
Combining these data, we can calculate the average (mean) amount of AGI for taxpayers in each class. This result is graphed in Figure 5. Again, the results are consistent with the expectation that incomes rise over an individual’s lifecycle, with some decline in retirement years. Furthermore, itemizing taxpayers have greater average AGI than the set of all taxpayers, although the pattern of AGI change remains the same across age classes, with AGI peaking in the 55 to 65 grouping.
Compare this profile however to that reported in Figure 6, which charts average (mean) total itemized deductions across age classes. Unlike AGI, the total for such deductions increases consistently as the age class increases. As will be shown in more detail below, the increase in the average deduction total for the age class 35 to 45 is partially associated with homeownership. The final step up at age 65 and over is due to the 7.5% AGI-limited medical and dental expenses deduction, which significantly increases (net of the limitation) from $13.3 billion for the 55 to 65 age class to $44.3 billion for the 65 and over class. For comparison purposes, also illustrated in Figure 6 are the averages for non-housing itemized deductions.  As can be seen in the Figure, the housing deductions represent a significant share of all itemized deductions for the average taxpayer. Moreover, this is particularly true for younger taxpayers.
The Mortgage Interest and Real Estate Tax Deductions
Using the new IRS data we can now examine the age characteristics of taxpayers claiming the two most common housing deductions: the mortgage interest and real estate tax deductions. Figure 7 plots the average mortgage interest deduction, including the deduction for home equity loans and mortgage insurance, by age class. Unlike the pattern in Figure 6, in which the total deduction value increases with age, the pattern in Figure 7 more closely represents the pattern discussed in an earlier Housing Economics article.  In this stylized description, the deduction for mortgage interest peaks soon after the taxpayer moves from renting to homeowning and then declines over their lifecycle as homeowners pay down existing mortgage debt and increases homeowner equity. This is consistent with the pattern that appears in Figure 7.
Figure 8 reports the shares of mortgage interest deductions by age class, and as expected the largest share is for the 35 to 45 age group, in which mortgage debt outstanding is likely to be highest among the group of all recent homebuyers. The shares are the lowest for both the youngest category (18 to 25) and the eldest (55 to 65, and 65 and over), which represent categories of households for whom holding mortgage debt is less likely due to renting (younger households) or owning a home free and clear of a mortgage (older households).
Interestingly, we can also zoom in on the age distribution of those claiming the deduction for mortgage insurance, as shown in Figure 9. As is expected, the largest shares for this deduction, associated with homebuyers with less than 20% of the home price as a downpayment, are for those aged 18 to 45.
The age-related pattern for the smaller (in aggregate for homeowners) real estate tax deduction differs somewhat. Unlike the mortgage interest deduction, which declines in value as taxpayers age and pay down their housing-related debt, the value of the real estate tax deduction grows as taxpayers age, mostly because the value of their homes grows as their household income and wealth increases.
Likewise, as seen in Figure 11, the shares of aggregate real estate tax deduction claims, compared to the mortgage interest deduction, shift to the older taxpayers. Indeed, the share for the over 65 age grouping increases 100% relative to the share for the same age group for the mortgage interest deduction (7% in Figure 8 vs. 14% in Figure 11).
Examining these age-related changes in deductions claimed in side-by-side fashion reveals the relative patterns of tax benefits among deductions. Figure 12 records the indexed change in the aggregate amounts across age classes. As expected, total AGI increases over the lifecycle, falling for the class of those itemizing taxpayers aged 65 or older. Real estate tax deductions increase roughly at the rate of all non- housing itemized deductions, until the 65 and up class when other non-housing deductions increase significantly. And the mortgage interest deduction peaks for the class of 35 to 45 year-olds, and then falls in the remaining years as home equity increases and mortgage debt outstanding falls.
Figure 13 shows these same data as shares of AGI. This figure shows the importance of these deductions as a share of taxpayer income. The data reveal that both housing tax deductions, mortgage interest and real estate taxes, fall as a share of AGI for older taxpayer. On the other hand, the share of all other non-housing deductions falls as share of income, but then rises for older taxpayers. This figure highlights the fact that housing deductions are more important for young households than older households. It is also worth noting the scale of importance of the MID compared to all other deductions for those under age 45.
Indeed, survey data are consistent with this anticipated distribution of the tax benefits. Poll data from RT Strategies in 2006 reported that 71% of renters thought it was reasonable to keep the housing tax rules in the tax code (very close to the 80% reported for homeowners). Given that the anticipated benefits are the most important to younger, recent buyers (at least in terms of household income), this response is consistent with expectations and the IRS data examined in this paper.
Unlike the housing deductions, an example of a tax issue that gains importance as taxpayers age, one should look no farther than the alternative minimum tax [AMT]. Figure 14 illustrates this fact.
The age distribution of tax benefits suggests certain intergenerational political economy issues in terms of tax proposals. For example, President Bush’s 2005 tax reform panel recommended using reductions in the values of the real estate and mortgage interest tax deductions to pay for reductions in the AMT. The results of this paper however indicate that such a proposal would reduce a tax benefit of greater relative importance of younger and growing households to reduce the tax burden of a feature of the tax code for which greatest burden lies on older taxpayers.
The descriptive statistics reported in this article demonstrate that the housing-related tax deductions, the mortgage interest and real estate tax deductions, strongly benefit younger households who tend to be recent homebuyers with larger mortgage debt. This is true in terms of both aggregate amounts claimed on tax forms, average deduction amounts, and shares of taxpayer income. These conclusions suggest that proposals to change these deductions should examine the generational consequences, particularly with respect to first-time homebuyers, as well as the income distributional impacts.
For more information about this item, please contact: Robert Dietz at 800-368-5242 x8285 (email@example.com)
Excluding these individuals results in the conclusions of this paper being understated.
This is slightly stylized because if these deductions were in fact removed, many taxpayers would cease to itemize, thus lifting the averages computed for Figure 6.
For more information about this item, please contact Robert Dietz at 800-368-5242 x8285 or via email at firstname.lastname@example.org.