Tax Deductions for Individuals: A Summary (CRS Report for Congress)
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| Release Date |
Revised March 17, 2017 |
| Report Number |
R42872 |
| Report Type |
Report |
| Authors |
Sean Lowry, Analyst in Public Finance |
| Source Agency |
Congressional Research Service |
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Summary:
Every tax filer has the option to claim deductions when filing their income tax return. Deductions
serve four main purposes in the tax code: (1) to account for large, unusual, and necessary personal
expenditures, such as extraordinary medical expenses; (2) to encourage certain types of activities,
such as homeownership and charitable contributions; (3) to ease the burden of taxes paid to state
and local governments; and (4) to adjust for the expenses of earning income, such as
unreimbursed employee expenses.
Some tax deductions can be taken by individuals even if they do not itemize. These deductions
are commonly referred to as above-the-line deductions, because they reduce a tax filer’s adjusted
gross income (AGI, or the line). In contrast, itemized and standard deductions are referred to as
below-the-line deductions, because they are applied after AGI is calculated to arrive at taxable
income.
Tax filers have the option to claim either a standard deduction or to itemize certain deductions.
The standard deduction, which is based on filing status, is, among other things, intended to reduce
the complexity of paying taxes, as it requires no additional documentation. Alternatively, tax
filers claiming itemized deductions must list each item separately on their tax return and be able
to provide documentation that the expenditures being deducted have been made. Only tax filers
with deductions that can be itemized in excess of the standard deduction find it worthwhile to
itemize. Whichever deduction the tax filer claims—standard or itemized—the amount is
subtracted from AGI.
Deductions differ from other tax provisions that can reduce a tax filer’s final tax liability.
Deductions reduce final tax liability by a percentage of the amount deducted, because deductions
are calculated before applicable marginal income tax rates. In contrast, tax credits generally
reduce an individual’s tax liability directly, on a dollar-for-dollar basis, because they are
incorporated into tax calculations after marginal tax rates are applied.
Some deductions can only be claimed if they meet or exceed minimum threshold amounts
(usually a certain percentage of AGI) in order to simplify tax administration and compliance. In
addition, some deductions are subject to a cap (also known as a ceiling) in benefits or eligibility.
Caps are meant to reduce the extent that tax provisions can distort economic behavior, limit
revenue losses, or reduce the availability of the deduction to higher-income tax filers.
Because some tax filers and policy makers may not have detailed knowledge of tax deductions,
this report first describes what they are, how they vary in their effects on reducing taxable
income, and how they differ from other provisions (e.g., exclusions or credits). Next, a discussion
concerning the rationale for deductions as part of the tax code is provided. Because some
deductions are classified as tax expenditures, or losses in federal revenue, they might be of
interest to Congress from a budgetary perspective. The final section of this report includes tables
that summarize each individual tax deduction, under current law. Many of these deductions are
part of the permanent income tax code. The Consolidated Appropriations Act (P.L. 114-113)
extended several temporary provisions through 2016 (for the 2017 tax filing season).
