10 big tax breaks for the rest of us

By Jeff Schnepper

Think the rich guys get all the tax breaks?

Wrong, deduction denier.

In fact, most of the big tax breaks go to middle-income earners like you and me. We don't call them tax shelters. But that's what they really are.

The tax pros call these shelters "tax expenditures." Because they represent dollars not collected by the government, these darling deductions and credits have the same impact on the federal budget as direct expenditures. And each of these expenditures gives special or selective tax relief to a certain targeted group of taxpayers.

Sounds like a tax shelter -- or at least a loophole -- to me.

These targeted provisions either encourage some desired activity or provide special aid to certain taxpayers. Some of them make a lot of sense. For example, the federal government seeks to encourage certain forms of investment. So Congress has legislated accelerated rather than straight-line depreciation on new plants and equipment. This produces more tax savings upfront, creating additional capital for business to expand.

Tax-advantaged investments help create new businesses and new jobs. These new jobs produce more paychecks, and those additional paychecks produce more taxes. In the long run, if everything works as it should, everyone wins.

Some tax expenditures have been adopted as relief provisions to ease tax hardships or to simplify tax computations. The elderly and the blind receive special financial benefits through a deduction called the "additional amount," which is added to their standard deduction. Other tax benefits for the aged -- the retirement income credit and the potential exclusion of Social Security payments from taxable income -- also fall into this personal or hardship category.

Cost now well over $1 trillion per year

Back in 1980, the Congressional Budget Office identified 92 provisions that qualified as tax expenditures, at a cost of $206 billion. Projected 2009 expenditures are more than $948 billion -- and that's before President Barack Obama's $900 billion stimulus expenditures.

The financial benefits offered by these tax expenditures resemble those available on the spending side of the budget. A tax expenditure provision can provide special tax relief in any of the following ways:

• Special exclusions, exemptions and deductions. These reduce taxable income and result in a smaller tax bills. Examples are tax-exempt municipal bond interest, the exclusion of employee discounts from taxable income, and dependent-care assistance programs.

• Preferential rates. These reduce tax bills by applying lower rates to all or part of your income. Congress gave taxpayers a big one in 2003: the special maximum tax rate on long-term capital gains or on qualified dividends. (This year, it's 0% for taxpayers in the 15% bracket or lower, 15% for everyone else.) While the dividend and capital gains breaks are available to all, it is true that higher-income taxpayers will derive more benefit than anyone else.

• Special credits. These are subtracted from your tax bill, rather than from the income on which your taxes are figured. For example, the child tax credit or the foreign tax credit.

• Tax deferrals. Deferrals let you pay later rather than now. These deferrals really constitute interest-free loans from the Internal Revenue Service. The best-known deferrals today are the contributions we make to individual retirement accounts, 401k accounts or similar retirement funds.

Continued: The biggest tax breaks

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