The January 2013 fiscal cliff tax deal raised tax rates for the wealthy, but Washington continues to look at limiting tax breaks – either to raise more revenue or to reform the tax code and lower tax rates, or both. Here are the most expensive “tax expenditures” benefiting individuals, based on the Joint Tax Committee’s estimates of what they’ll cost Uncle Sam in 2013 through 2017. The list includes not only deductions and income exclusions, but also refundable credits and subsidies that are wholly or partly delivered through the tax code and IRS.
1. Employer Paid Health Insurance
Five year cost: $760 billion
If a company provides you with health insurance or health care, it can deduct the cost from its taxable income. But the value of the premiums or care is not counted as income to you, even though it may now, confusingly, show up on your W-2 (in box 12, Code DD). Beginning in 2018, the value of certain high-cost “Cadillac” health insurance plans will be subject to a premium tax, but even that tax won’t be levied directly on individuals.
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2. Lower Rate For Capital Gains, Dividends
Five year cost: $616 billion
Qualified corporate dividends and capital gains on stock and certain other investments held for more than a year are taxed at a top 20% rate, compared to a 39.6% rate for ordinary income such as salary and taxable bond and CD interest. Among the biggest tax expenditures, the benefit of this one skews the most to the rich.
3. State And Local Tax Deductions
Five year cost: $431 billion
Taxpayers who itemize can deduct state income or sales tax, plus taxes on personal property. The tally for that is $278 billion. Itemizers can also deduct real estate taxes on their homes – another $153 billion over the five years.
4. Mortgage interest deduction
Five year cost: $379 billion
Taxpayers can deduct interest paid on mortgages totaling up to $1.1 million used to buy or improve a primary home and a secondary or vacation home. A yacht with a berth, galley and head can count as a second home. The $379 billion doesn’t include other breaks for housing, such as the exclusion from income of up to $500,000 per couple in capital gains from the sale of a principal residence, which will cost $130 billion over the next five years.
5. Tax Free Medicare Benefits
Five year cost: $358 billion
All Medicare insurance benefits are excluded from taxation. To the extent that the value of that insurance exceeds the premiums senior pay and the amount they have contributed in Medicare taxes during their working years, the value of Medicare is considered untaxed income to them.
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6. Workplace Retirement Saving Plans
Five year cost: $336 billion
This number includes the exclusion from taxable income of employer and employee contributions to 401(k)s and other employer sponsored retirement savings plans, as well as the exclusion of earnings in these accounts. It doesn't include the additional $64 billion cost for retirement plans for the self employed or the $212 billion cost for traditional, employer paid “defined benefit” pensions – the kind that pay a set amount each month.
7. Earned Income Credit
Five year cost: $326 billion
This credit is available to low income working families; the maximum credit in 2013 for families with three or more children is $6,044. The credit is refundable – meaning families can get back more from the credit than paid in taxes. Of the $326 billion, $283 billion will be made up of such refunds.
8. Child Credit
Five year cost: $292 billion
This $1,000 credit for each child under 17 begins to phase out once a couple’s modified adjusted gross income exceeds $110,000 or a single parent’s MAGI exceeds $75,000. The credit is partially refundable – meaning families can get back more from the credit than they paid in income tax. Of the $292 billion cost, $154 billion comes from such refunds.
Full List: The 15 Most Expensive Tax Breaks