| It's
not just the rich who shelter huge amounts of income from the
IRS. See how you stack up. |
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
really what they are.
The tax pros call these shelters “tax expenditures.” These
darling deductions and credits have the same impact on the
federal budget as direct expenditures. That’s because they
represent dollars not collected by the government. And each of
these expenditures gives special or selective tax relief to only
certain targeted groups 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 up
front, 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: $800 billion per year
Back in 1980, the Congressional Budget Office had 92 provisions
that qualified as tax expenditures, at a cost of $206 billion.
President Bush’s fiscal year 2004 budget listed 137 individual
tax expenditures projected at more than $800 billion.
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.
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| Preferential rates.
These reduce tax bills by applying lower rates to all or
part of your income. Congress gave taxpayers a big one this
past year: the new special maximum tax rate on long-term
capital gains or on qualified dividends. (It’s 5% 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-end taxpayers will derive more
benefit than anyone else. The Citizens for Tax Justice
estimates that more than half of the benefits will go to
taxpayers with incomes above $145,000.
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| 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. Such deferrals
really constitute interest-free loans from the IRS. The
best-known deferrals today are the contributions we make to
Individual Retirement Accounts, 401(k) accounts or similar
retirement funds. |
The other side of big spending
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.
So much for 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? The Joint Committee on Taxation recently released
tax expenditure estimates for fiscal years 2004-2008. 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 the tax break, 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 these five years: $602.7 billion.
This total doesn’t include the estimated cost for deductible
Health Insurance and long-term care insurance premiums.
That’s an additional $20 billion.
|
| Contributions to retirement accounts.
You don’t pay any current tax when you or your employer sock
money away in pension and retirement plans. Cost to the
government: $522.1 billion.
|
| Lower rates on dividends and long-term
capital gains. Cost to the
government: $406.3 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: $372.7 billion.
About 73% of the taxpayers who claimed this deduction on
their 2002 returns earned $50,000 or more. About 47% of the
total earned between $50,000 and $100,000.
|
| State and local income taxes and personal
property taxes. You get a
deduction for state and local taxes and personal property
taxes paid. Cost to the government: $195.2 billion.
About 94% of the 36.7 million tax returns that claimed the
income tax deduction reported earnings of $50,000 or more.
And 46% of the total earned 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: $158 billion.
About 81% of the 38.1 million tax returns that claimed this
deduction reported earnings of $50,000 or more. About 43% of
the total had earnings of between $50,000 and $100,000.
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| Children under age 17.
The child tax credit puts $1,000 per child in your pocket.
Cost to the government: $173 billion.
About 53% of the 31 million tax returns that claimed this
deduction reported earnings of $50,000 or more. And 75% of
that group earned between $50,000 and $100,000.
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| The earned income credit.
You qualify for the earned income tax credit, which is
targeted at low-income taxpayers. Cost to the government:
$179.7 billion.
About 96% of the tax returns that claimed this benefit last
year had earnings of $40,000 or less.
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| Life Insurance or annuity contracts.
No current tax on the inside investment income. Cost to the
government: $137.5 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: $202.6 billion. |
The total for the 10 above? $2.95 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 $77.8 billion over the next five years. (A total of 34.5
million tax returns claimed the real estate property tax
deduction last year.)
And the big break you now get on any profits from selling your
home: Another $91.4 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, your deductions for interest, real estate
tax and state income tax are coming out of the taxes I pay. And
you’re the one with a real tax shelter. I’m the one
making up the difference.
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