LegiStorm

Summary:

Reforming or limiting itemized tax deductions for individuals has gained the interest of policy makers as one way to increase federal tax revenue, increase the share of taxes paid by higherincome tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. However, limits on deductions could cause adverse economic effects or changes in the distributional burden of the federal income tax code. This report is intended to identify who claims itemized deductions, for how much, and for which provisions. This report analyzes data to inform the policy debate about reforming itemized tax deductions for individuals. In 2014, 30% of all tax filers chose to itemize their deductions rather than claim the standard deduction. In addition, the data indicate that both the share of tax filers who itemized their deductions and the amount claimed by each tax filer increased as adjusted gross income (AGI) increases. AGI is the basic measure of income under the federal income tax and is the income measurement before itemized deductions and personal exemptions are taken into account. Although higher-income tax filers were more likely to itemize their deductions and claim a larger amount of itemized deductions than lower-income tax filers, the majority of itemizers (56.2%) had an AGI less than $100,000, and 86.8% of itemizers had an AGI less than $200,000. Tax filers in different income ranges tended to claim different itemized deductions in different frequencies. In 2014, tax filers in higher income ranges claimed deductions for charitable gifts, state and local income taxes, and real estate taxes at higher rates than tax filers in lower income ranges. For example, the deduction for charitable gifts was claimed by 37% of itemizing tax filers with an AGI between $50,000 and $100,000, whereas it was claimed by 68% to 87% of itemizing tax filers with an AGI above $100,000. Deductions for state and local income taxes and the deduction for charitable gifts comprised a larger share of itemized deductions as income rose. The four largest itemized deductions are estimated to account for 17.8% ($241.2 billion) of the approximately $1.4 trillion in tax expenditures in FY2018. These deductions were for state and local income or sales taxes, home mortgage interest, charitable gifts, and real estate taxes. These findings have several implications for reforming or limiting itemized tax deductions. First, efforts to target itemized tax deduction limits on the highest income class analyzed in this report (+$1 million in AGI) are limited in the amount of revenue that can be raised. Although tax filers with an AGI greater than $1 million claimed a larger average amount of deductions ($424,864), 87% of itemizers had an AGI less than $200,000 (or 97% have less than $500,000 in AGI) and they accounted for 65% of itemized deductions claimed (or 82% for itemizers with less than $500,000 in AGI). Second, the structure of a limit on itemized deductions could affect which deductions a tax filer might claim. A limit based on a percentage reduction in the overall tax benefits of itemized deductions would not likely change the relative choice of deduction claims. However, limits using a flat-dollar amount likely would alter deduction claims and possibly tax filer behavior. A tax filer who has deductions that exceed a flat-dollar value cap must choose which deductions to claim. Even if a tax filer chooses not to claim a particular deduction because of the dollar cap, the tax filer might still engage in the activity for other reasons (although possibly to a lesser extent). Third, the structure of a limit on itemized deductions also has an effect on its capacity to raise revenue. Limiting deductions might raise the taxable income of some individuals, and tax a higher share of their income at a higher marginal tax rate. However, certain combinations of deduction limits may shift some tax filers to claim the standard deduction instead of itemizing. In this case, the revenue increase by limiting itemized deduction would be partially offset by more tax filers claiming the standard deduction.