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Tax Deductions High-Income Earners Use Most

Jul 11th 2017
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New data released by the IRS sheds some light on just what income and what is tax deductible for high-income earners.

The hands-down winner is the deduction for state and local taxes, with households earning more than $200,000 annually deducting $243 billion in 2014. That’s 47 percent of all state and local taxes deducted by US households that year.

The next two largest deductions in 2014 – though dramatically lower than state and local taxes – were the charitable deduction at $108 billion and the home mortgage interest deduction at $63 billion.

According to a new Tax Foundation analysis, these provisions are “tilted toward high-income households,” with 51 percent of all charitable deductions and 22 percent of all mortgage interest deductions claimed by households in the $200,000-plus income category.

Here’s the remainder of the top tax deductions taken by high-income earners:

  • Investment interest expense deduction: $11 billion
  • Unreimbursed employee expense deduction: $7 billion
  • Medical and dental expense deduction: $5 billion
  • Casualty and theft loss deduction: $282 million

“This data has a clear takeaway: If lawmakers are interested in reducing the amount of deductions taken by high-income households, they only have a few major provisions to work with,” said Scott Greenberg, senior analyst at the Tax Foundation. “In particular, if policymakers take the state and local tax deduction off the table, they will have a very hard time finding other ways to broaden the individual income tax base enough to allow for substantial rate cuts.”

The IRS uses two income concepts to classify tax returns as high income: adjusted gross income (AGI) and the expanded income concept.

The expanded income concept uses items reported on tax returns for a more comprehensive measure of income than AGI, the IRS states. For example, expanded income is the AGI plus tax-exempt interest, nontaxable Social Security benefits, foreign-earned income exclusion, and items of “tax preference” for alternative minimum tax purposes less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it doesn’t exceed investment income, and assorted itemized deductions that aren’t subject to the 2 percent-of-AGI floor.

How many people are we talking about? In 2014, there were slightly more than 6.2 million individual tax returns with an AGI of at least $200,000 and about 6.3 million returns with an expanded income of $200,000 or more.

The number of returns with an AGI of more than $200,000 rose 12 percent from 2013 and comprised 4.2 percent of all returns in 2014. Returns with expanded incomes above $200,000 increased 11.8 percent from 2013 and also comprised 4.2 percent of 2014 returns.

In addition, AGI and expanded income differed for 44.3 million (or 29.8 percent) of the 148.6 million tax returns filed in 2014. Expanded income was more than AGI in two-thirds of the returns, according to the IRS.