10 big tax breaks for the rest of us

Tax-expenditure spending and direct spending are two sides of the same coin. Nearly any tax expenditure can be recast as a spending program. One side reduces the revenues collected. The other side increases the actual cash outflows. The real difference is nothing more than a choice between alternative administrative mechanisms.

At least that's the theory. In fact, just like spending provisions, these tax expenditures are really the result of pressure applied by special-interest groups seeking relief provisions for their own constituencies.

For example, the additional amount added to the standard deduction for the blind isn't available for the deaf. I suspect this may have more to do with the political and lobbying power of the two groups than with any inherent difference between the hardships.

What kind of savings are you getting from your own expenditure tax shelters? A lot, according to a 2008 report by the Joint Committee on Taxation (.pdf file) on tax expenditure estimates for fiscal years 2008-2012. Check out the tax shelter deals you may be getting. (Note: These are ranked by size.)

The biggest tax breaks

And if you're not claiming these tax breaks, investigate to see if you can.

• Health-care benefits. You don't pay any tax when your employer pays the premiums for your health insurance and health care. Cost to the government over five years: $534 billion. This total doesn't include the estimated cost for deductible health insurance and long-term care insurance premiums. That's an additional $22.6 billion.

• Contributions to retirement accounts. You don't pay any current tax when you or your employer socks away money in pension and retirement plans. Cost to the government: $706.5 billion.

• Lower rates on dividends and long-term capital gains. Cost to the government: $438.1 billion.

• The mortgage-interest deduction. We all love the deduction for home-mortgage interest. But renters and those who own their homes free and clear get nothing. Cost to the government: $402.7 billion. About 79% of the taxpayers who claimed this deduction on their 2005 returns earned $50,000 or more. About 40% of the total earned between $50,000 and $100,000.

• State and local income/sales taxes and personal property taxes. You get a deduction for state and local income or sales taxes and personal property taxes paid. Cost to the government: $148.5 billion. About 81% of the 44.2 million returns that claimed this deduction had incomes of $50,000 or more. About 43% had incomes between $50,000 and $100,000.

• Charitable contributions. Very noble of you. But the rest of us kick in a part of your cost. Cost to the government: $240 billion. About 83% of the 39.2 million tax returns that claimed this deduction reported earnings of $50,000 or more. About 41% of the total had earnings of between $50,000 and $100,000.

• Children under age 17. The child tax credit puts up to $1,000 per child in your pocket. Cost to the government: $230 billion. About 50% of the 31.6 million tax returns that claimed this deduction reported earnings of $50,000 or more. And 69% of that group earned between $50,000 and $100,000.

• The earned income credit. You qualify for the earned income tax credit, which is targeted at low-income taxpayers. Cost to the government: $218.3 billion. About 92% of the tax returns that claimed this benefit last year had earnings of $40,000 or less.

• Life insurance or annuity contracts. No current tax on the inside investment income. Cost to the government: $147.1 billion.

• You die. The basis for all of your assets (the value at which you start to calculate potential capital gains) is stepped up to fair market value on the date of your demise. That means that the tax on all capital gains you earned up to the date of death is lost. Cost to the government: $290.2 billion.

The total for the 10 above? $3.38 trillion over five years. And I haven't even mentioned that the deduction you get to take for property taxes on your home will cost the feds an estimated $73.8 billion over the next five years. We won't even get to the $500/$1,000 addition to your standard deduction for property taxes on your home.

And the big break you now get on any profits from selling your home: An additional $128.4 billion.

I'm not saying that any of these exclusions, deductions or credits is a bad idea. I'm just shining a light on the fact that all the breaks don't really go to the big guys.

I guess that if the expenditure puts money in my pocket, it represents good, sound tax policy.

On the other hand, if I'm a renter in a state with a high sales tax and no income tax and you own a home in a state that has income tax, your deductions for interest, real estate tax and state income tax are coming out of the taxes I pay. You're the one with a real tax shelter. I'm the one making up the difference.

Updated July 7, 2009

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