our tax clients, Jack and Diane a married couple filing a joint return, fell in love with a new construction house for sale in their small Illinois hometown. The builder offers two options on the home: purchase with 20% down or rent the home. Assume the following facts and projections when considering the analysis:

• Jack and Diane both have steady jobs with a current AGI of $120,000. They anticipate annual AGI growth of 3%.
• The home has a purchase price of $200,000 and is located in an area with an expected annual property value growth rate of 5%.
• If Jack and Diane purchase the home, they will put 20% down and finance the remainder on a 30 year mortgage at 5.25%.
• Annual property taxes on the home are 2.6% of the homes value.
• If Jack and Diane rent the home, they will invest what would have been their 20% down payment into municipal bonds paying an annual interest rate of 4%.
• The home rents for 1% of the assessed property value per month.
• Jack and Diane will use the home as their principal residence for all 10 years.
• Regardless of their decision, Jack and Diane intend to contribute 10% of their AGI each year to their favorite qualified charitable organizations.
• Jack and Diane intend to move out of the area in 10 years to support their parents in retirement.
• Jack and Diane live in a state which imposes a tax on Federal AGI at 4.95%. Jack and Diane used the federal individual income tax rate brackets that were in effect in 2019 for all future years.

Using 2019 income tax brackets and assuming a Standard Deduction increase of 1.67% each year, you have created the following Tableau visualization to help Jack and Diane make a decision.

Note: the Detail pane provides a summation of values based on the selected Year and Option criteria. Use the Year sliders and Option checkboxes to update the visual during your analysis.

Required:

1. What is the effective tax rate in Year 4 if Jack and Diane rent; own?
2. What is the projected property tax on the home in Year 7?
3. What is the State Tax Deduction for Year 5 if Jack and Diane own?
4. How much Mortgage Interest is paid by Jack and Diane over the 10 year period?