Tax expenditures save taxpayers money, cost federal government
As April 15 inches closer, more people start crunching the numbers to see what they owe Uncle Sam in annual income taxes. While sorting through these byzantine numbers, individuals will run across many deductions and credits that can lower their tax burdens substantially.
But these tax breaks for individuals — which include the earned income tax credit and the charitable giving deduction — cost the government close to $1.1 trillion in 2011, according to a report from the Center on Budget and Policy Priorities.
Tax deductions reduce an individual’s taxable income by a percentage while tax credits reduce the amount owed dollar-for-dollar.
If they were classified as “spending”, the breaks would be larger than the total of Medicare and Medicaid outlays combined, more than Social Security obligations and nearly double the annual amount the government spent on discretionary items.
Over the next decade, the cost of these tax breaks will total close to $12 trillion and for 2012 alone, they come to major expenditures totaling more than $800 billion, according to the Congressional Budget Office.
Two of the largest tax breaks, according to a report by the Joint Committee on Taxation, are the exclusion of employee contributions to health insurance, which cost an estimated $117.3 billion in 2012, and the home-mortgage interest deduction, clocking in at an estimated $68.5 billion for the same year.
“The large beneficiaries of most of these are not the rich, they are the middle-income people and upper-middle income people,” said Howard Gleckman, a resident fellow at the Tax Policy Center, citing those as two prominent examples.
Not all tax breaks benefit the middle class though. The charitable contribution deduction is tilted more toward those with high incomes, he said.
“Charitable giving is something that very wealthy people do benefit from, somewhat more out of proportion to their numbers because very, very wealthy people… tend to give very, very large gifts,” Gleckman said.
But there does tend to be a range of generosity, said Geoff Harlow, a CPA at Kessler Orlean Silver. Some tend to donate a good portion of their incomes while others don’t.
“Among those that are generous, I’d say a fair amount of people tend to donate money to their church. People will often donate a fair amount of money to their alma maters. People will often have pet causes,” he said.
Harlow commonly sees the foreign tax credit, which he said “prevents double taxation on foreign-source income,” and research and development tax credits among his clientele, who tend to be wealthier.
The state and local government tax deduction is also widely used. According to a report by the Internal Revenue Service, 44.5 million tax returns were filed in 2011 that used this deduction, though it was slightly down from 44.8 million the year before.
Some tax credits, which lower a person’s tax liability dollar-for-dollar, target the most vulnerable, including the earned income tax credit and the child tax credit. For instance, to qualify for the former, a family of four could make no more than $41,952 annually.
“These are credits that are aimed toward low-income working people,” Gleckman said. “Some people confuse these with welfare, but if you don’t make any money — if you’re not working, you can’t really benefit from these credits.”