Itemized Tax Deductions for Individuals: Data Analysis

Summary

Reforming or limiting itemized tax deductions for individuals has gained the interest of policy makers as one way to increase federal tax revenue, increase the share of taxes paid by higher-income tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. However, limits on deductions could cause adverse economic effects or changes in the distributional burden of the federal income tax code. This report is intended to identify who claims itemized deductions, for how much, and for which provisions.

This report analyzes data to inform the policy debate about reforming itemized tax deductions for individuals. In 2011, 32% of all tax filers chose to itemize their deductions rather than claim the standard deduction. In addition, the data indicate that both the share of tax filers who itemize their deductions and the amount claimed by each tax filer increase as adjusted gross income (AGI) increases. AGI is the basic measure of income under the federal income tax and is the income measurement before itemized deductions and personal exemptions are taken into account. Although higher-income tax filers are more likely to itemize their deductions and claim a larger amount of itemized deductions than lower-income tax filers, the majority of itemizers (63.6%) have incomes below $100,000, and 90.3% of itemizers have an AGI below $200,000.

Tax filers in different income ranges tend to claim different itemized deductions. In 2011, tax filers in higher income ranges claimed deductions for charitable gifts, state and local taxes, and real estate property taxes at higher rates than tax filers in lower income ranges. For example, the deduction for charitable gifts was claimed by 45% of tax filers with an AGI between $50,000 and $100,000, whereas it was claimed by 75% to 94% of tax filers with an AGI above $100,000. Deductions for state and local taxes and the deduction for charitable gifts comprise a larger share of itemized deductions as income rises.

The four largest itemized deductions are estimated to account for 17.8% ($195.7 billion) of the approximately $1.1 trillion in tax expenditures in FY2014. These deductions are for home mortgage interest, state and local taxes, charitable gifts, and real estate taxes.

These findings have several implications for policy options that would seek to reform or limit itemized tax deductions. First, efforts to target limits on itemized tax deductions toward higher-income tax filers are limited in the amount of revenue that can possibly be raised. Although higher-income tax filers claim a larger average amount of deductions, these tax filers make up a small share of itemizers.

Second, the structure of a limit on itemized deductions could affect which deductions a tax filer might claim. Although a limit based on a percentage reduction in the overall tax benefits of itemized deductions would not likely change the relative choice of deduction claims, limits based on a flat-dollar value cap likely would alter deduction claims and possibly tax filer behavior. This could happen if a tax filer has deductions that exceed a flat-dollar value cap, because the tax filer must make a decision about which deductions to actually claim. Even if a tax filer cannot claim a tax deduction for a particular activity, the tax filer might still engage in the activity for other reasons (although possibly to a lesser extent).

Third, the structure of a limit on itemized deductions also has an effect on its ability to raise revenue. Limiting deductions might raise the taxable income of some individuals, thereby pushing them into a higher marginal tax bracket, and tax a higher share of their income at that higher marginal tax rate. However, certain combinations of deduction limits may shift some tax filers to claim the standard deduction instead of itemizing. In this case, the revenue increase by limiting itemized deduction would be partially offset by more tax filers claiming the standard deduction.