Key Issues in Tax Reform: Itemized Tax Deductions

Key Issues in Tax Reform: Itemized Tax Deductions

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Updated November 15, 2017
Key Issues in Tax Reform: Itemized Tax Deductions
Brief Summary of Current Law
Figure 1. Itemized Deductions Estimated to
Individual tax filers have the option to claim the standard
Contribute Most to Revenue Losses ($ Bil.), FY2018
deduction or itemize their tax deductions, typically
choosing whichever provides the larger tax benefit.
Itemized deductions are available for a diverse set of
activities such as: mortgage interest, charitable giving, state
and local sales or income taxes, real property taxes,
unreimbursed employee business expenses, and
extraordinary medical expenses. For high-income filers, a
limit on itemized deductions (“Pease” limitation) might
apply, but this provision actually is structured more like an
income surtax since it is triggered by income and not by the
amount of deductions claimed.
As shown in Table 1, 30% of all filers in the 2015 tax year
chose to itemize. The average sum of itemized deductions

Source: CRS analysis of JCT, Estimates of Federal Tax Expenditures,
among all filers was $28,214, but this total varied widely
For Fiscal Years 2016-2020, 115th Congress, 1st session, January 3,
from one end of the income spectrum to the other.
2017, JCX-3-17.
Table 1. Tax Data on Itemizers, Tax Year 2015
Notes: CRS tabulated the sum of all individual tax expenditures
included in the JCT publication as $1,298 billion in FY2018. Numbers
Average Sum of
might not add to 100% due to rounding.
Share of Tax
Deductions
Adjusted Gross
Filers Who
Claimed per
The Tax Cuts and Jobs Act (TCJA; H.R. 1)
Income (AGI)
Itemize
Itemizer
Table 2 summarizes changes to select itemized deduction
provisions proposed in the House and Senate versions of
$1 to $19,999
5%
$15,596
the TCJA. Both versions would repeal most itemized
$20k to $49,999
17%
$16,115
deductions or at least restrict them, relative to current law,
beginning in 2018. The House version retains individual
$50k to $99,999
44%
$19,199
itemized deductions only for mortgage interest, state and
$100k to $199,999
76%
$25,517
local real property taxes (up to $10,000), and charitable
contributions.
$200k to $499,999
94%
$43,427
$500k to $1 mil ion
93%
$84,820
The House and Senate versions would also repeal personal
exemptions, increase the standard deduction, and index the
$1 million +
91%
$436,732
standard deduction to inflation using the Chained Consumer
All tax filers
30%
$28,214
Price Index for all Urban Consumers (C-CPI-U) instead of
the current unchained CPI-U. Under current law, the
Source: CRS analysis of the Internal Revenue Service’s Statistics of
standard deduction in 2018 for married joint filers is
Income data, Tables 1.4 and 2.1, at https://www.irs.gov/uac/soi-tax-
$13,000 with a combined personal exemption of $8,300 (for
stats-individual-statistical-tables-by-size-of-adjusted-gross-income.
a total of $21,300). Single filers can claim a standard
deduction of $6,500 plus a personal exemption of $4,150
Budgetary Issues Under Current Law
(for a total of $10,650). Within certain income limits,
Some itemized deductions rank among the largest
additional personal exemptions can be claimed for any
individual tax expenditures, or revenue losses compared to
dependents.
a broader baseline of income. Specifically, the deductions
for mortgage interest, state and local taxes, and charitable
Economic Issues. From an economic perspective, itemized
contributions rank within the top 10 largest individual tax
deductions target a mixed bag of economic activities. Some
expenditures, according to estimates by the Joint
provisions encourage certain types of behavior (e.g.,
Committee on Taxation (JCT). Figure 1 indicates that the
purchasing a mortgaged house, charitable giving), account
five largest itemized deductions, in terms of revenue loss,
for circumstances that reduce a filer’s ability to pay taxes
account for $264 billion (without interaction effects), or
(e.g., extraordinary medical expenses, unreimbursed
20% of all individual tax expenditures, in FY2018.
employee business expenses, casualty and theft losses), or
subsidize state and local government spending (e.g.,
deduction for state and local nonbusiness taxes). Some of
these activities could have positive or negative spillover
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Key Issues in Tax Reform: Itemized Tax Deductions
effects that could affect assessments of their justification in
Changes to specific itemized deductions in both versions of
the tax code. Alternatively, some of these benefits could be
the TCJA would have mixed distributional effects. Broad
delivered through direct spending programs to reduce the
repeal of itemized deductions, particularly for state and
complexity and enhance the progressivity of the tax code.
local income taxes, and increasing the standard deduction
would increase progressivity of the individual tax code.
A broader argument can be made that itemized deductions
are regressive, as most of the benefits of itemized
Post-TCJA, the tax benefits from itemized deductions are
deductions accrue to higher-income filers. Itemized
likely to be even more concentrated in higher-income
deductions are typically claimed by one-third of individual
ranges. Middle and upper-middle income taxpayers will be
filers, and most of these filers are middle- to higher-income.
less likely to itemize due to the higher standard deduction
The provisions are structured as a deduction also means the
and the repeal and modification of other provisions.
tax benefit of an itemized deduction increases with one’s
top marginal tax rate.
Budgetary Issues. Limits on itemized deductions raise
revenue by increasing the amount of income subject to
Repeal or restriction of itemized deductions combined with
taxation and potentially subjecting more income to higher
an increase in the standard deduction will decrease the
marginal tax rates. In both versions of the TCJA, the
share of tax filers that itemize under the changes proposed
revenue increase from limiting itemized deductions would
in the TCJA. The Chief of Staff to the JCT testified during
be partially offset by more tax filers claiming the standard
markup of the House version that the share of tax filers that
deduction. Indexing the standard deduction to the C-CPI-U
itemize would decrease from 29% to 6% in 2018 under that
will reduce budgetary costs over time because this chained
proposal. Although both versions of the TCJA maintain
index grows more slowly than the unchained CPI-U used
deductions for mortgage interest and charitable giving, for
under current law.
example, only those with total itemized deductions
exceeding the increased standard deduction will be

motivated by the tax-based incentives to engage in further
activity related to those provisions.

Table 2.Changes to Select Provisions in the Tax Cuts and Jobs Act, Effective Tax Year 2018
Modification to Senate Chairman’s Mark
(All provisions except C-CPI-U indexation
Provision
House Version (H.R. 1)
expire after 2025)
Standard deduction
$12,200 (S); $18,300 (HOH); $24,400 (MFJ)
$12,000 (S); $18,000 (HOH); $24,000 (MFJ)
(2018 amounts by filing status)
Indexed to C-CPI-U inflation beginning in 2020 Indexed to C-CPI-U inflation beginning in 2019
“Pease” limitation
Repeal
Repeal
Select itemized deductions
State and local nonbusiness taxes

–Income or sales, personal property Repeal
Repeal
–Real estate
Restrict deduction to $10k
Repeal
Mortgage interest
Restrict deduction to first $500,000 in
Maintain current law restriction to interest deduction
indebtedness on primary residence and repeal on first $1m in mortgage indebtedness on primary or
deduction for home equity indebtedness
secondary residences but repeal deduction for home
equity indebtedness
Charitable contributions
Maintain current law, with modifications
Maintain current law, with modifications
Medical expenses deduction
Repeal
Maintain current law restriction that costs are only
deductible if they exceed 10% of adj. gross income
Personal casualty losses
Repeal. Preserve the an above-the-line
Restrict deduction to casualty losses associated with
deduction for certain casualty losses
certain disasters
associated with special 2017 disaster legislation
Sources: CRS summary of Tax Cuts and Jobs Act (H.R. 1) and JCT documents. See JCT, Description of H.R. 1, The “Tax Cuts and Jobs Act”, JCX-
50-17, November 9, 2017; Description of the Chairman’s Modification to the Chairman’s Mark of the “Tax Cuts and Jobs Act”, JCX-56-17, November
14, 2017; and Description of the Chairman’s Mark of the “Tax Cuts and Jobs Act”, JCX-51-17, November 9, 2017.

Sean Lowry, Analyst in Public Finance

IF10579
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Key Issues in Tax Reform: Itemized Tax Deductions

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