President Barack Obama didn't benefit last year from the huge break in the tax code that allows his presumptive rival, Mitt Romney, to pay taxes at a lower effective rate than most anyone who earns a regular middle-class salary. But the president and his wife did save more than $10,000 in 2011 by claiming a tax break that favors the wealthiest Americans.
According to their tax returns released Friday by the White House, the president and the first lady claimed a $47,564 home mortgage interest deduction on their house in Chicago, which they bought in 2005 for $1.65 million. That equates to $13,318 in savings on their federal tax bill, according to an analysis by Michael Gillen, director of the tax group at the Philadelphia law firm Duane Morris.
While most of the beneficiaries of the mortgage deduction are middle-class borrowers -- about two-thirds of those who claim the deduction earn less than $200,000 -- homeowners with larger, more expensive houses typically save much more on their tax bills. Average homeowners with incomes between $40,000 and $75,000 who claim the deduction save just $523 in taxes, economists at the University of Pennsylvania found. Average homeowners with incomes greater than $250,000 who claim the deduction save $5,459 on their tax bills.
Renters, of course, save nothing. Nor do the millions of Americans in low-cost homes who pay mortgage interest each year, but don't itemize their deductions because it is not worthwhile for them to do so. Just 1 in 4 Americans claimed the benefit on their taxes in 2010, the last year studied, according to the nonprofit Tax Foundation.
The mortgage interest deduction, which allows borrowers to reduce their taxable income by the amount of interest paid on a loan (or loans) with a value of up to $1.1 million, has long been seen as an untouchable middle-class benefit. But many academic studies over the past few years have found it benefits the wealthy the most -- and doesn't really encourage homeownership.
"Lots of middle-class people take the deduction and realize some savings on their tax bill, but they don't understand that it is badly skewed," said Seth Hanlon, director of fiscal reform at the liberal-leaning Center for American Progress. "A lot of people don't realize that the benefit can be taken on vacation homes or even a boat."
Hanlon said his organization favors altering the deduction so that everyone receives the same level of tax benefit regardless of tax bracket. He said this change could be phased in slowly to avoid rattling an already depressed housing market.
With the federal budget deficit careening out of control, some in Washington have proposed paring back the deduction. Most notably, the deficit reduction commission appointed by President Obama -- and led by former Sen. Alan Simpson and onetime White House Chief of Staff Erskine Bowles -- suggested reducing the limit on the deduction to $500,000 of a home's value and eliminating the tax break for a second home.
The bipartisan group of senators known as the Gang of Six that met last year in an effort to hammer out a deficit deal also reportedly embraced this plan.
Would-be reformers face powerful opposition from groups like the National Association of Home Builders. An association spokesman did not return a message left Friday afternoon, but the group put out a press release earlier this week that called the interest deduction "a cornerstone of U.S. tax and housing policy."
"The mortgage interest deduction primarily helps middle class home owners and is consistent with the principles of a progressive income tax," the April 11 release said. "Two-thirds of the benefits flow to working class American households who earn less than $200,000 annually and nearly all those who own a home of their own will claim the deduction at some point during their tenure as home owners."
Changing the rules would "penalize millions of baby boomers nearing retirement and seniors who own their homes outright," said association Chairman Barry Rutenberg, according to the press release. "The collateral damage to the economy would be even more devastating, resulting in lower home values, which would leave more home owners underwater, trigger more foreclosures and prolong the housing slump for years to come."
The president and the first lady paid an effective tax rate of about 20.5 percent in 2011 on adjusted gross income of $789,674. The rate would have been higher if not for the mortgage interest deduction, but the largest tax saving came from charitable deductions. The Obamas gave $172,130 to charity in 2011, which was 22 percent of their income.
In January, the Romney campaign released an estimated tax return for 2011 indicating he will likely pay an effective tax rate of 15.4 percent on $20.9 million in adjusted gross income. Romney also makes charitable donations, but his biggest tax benefit is due to how he makes money. Almost all of his earnings come from investments, which are taxed at a 15 percent rate.
The White House did not return a request for comment on Friday.
This story has been updated with a revised estimate of the Obamas' tax savings from Michael Gillen.