A recent study finds a small group collects approximately 27 percent of all tax breaks. These include deductions, stepped-up basis on inherited property and also preferential rates on capital gains and dividends.
The Tax Policy Center report breaks down who takes advantage of what. Tax savings from itemized deductions plus capital gain and dividend treatment can account for as much as three to four percent of income. Compare this with refundable credits – the Earned Income Tax Credit (EITC) and child tax credit (CTC) – which account for less than one percent (0.9 to be exact) for the lowest 40 percent of households.
The IRS collected $1.17 trillion less than it could have, because of a myriad of deductions. Wealthier households see a higher benefit from some of these. Take charitable giving, a couple giving a percentage to their church, synagogue or mosque will see some advantage. But a couple in a position to donate a work of art will gain a greater benefit with the caveat they may face IRS questions over the value in a tax audit.
The mortgage interest tax deduction is the most advantageous to the upper-middle class. You’ve got to be in a position to purchase a home, but not such a big one that you hit the cap on what you can deduct.
Amazingly, the top one percent of households receives 32 percent of the benefit from itemized deductions. But this is nothing compared with capital gains and dividends.
60 percent of the benefit
Because most Americans have saving in tax-free accounts like a 401(k) retirement account or 529 college savings plan, they do not pay capital gains. Most people have few investments that will be subject to tax.
The top one percent (about 1.1 million people) with income over $700,000 tend to be those who benefit from the preferential rates on capital gains and dividends. The current top rate for long-term capital gains or dividends in 20 percent, but the tax rate on ordinary income over $415,050 is 39.6 percent.
Even while the wealthy receive a number of benefits under the tax code, they are also the most highly audited. With more income and diversified holding, there is more room for error.