More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
With heated debate about deficit reduction flying around Washington and in the blogosphere, AdvisorOne asks an obvious question: What needs to be cut? There's plenty spending to cut but we’re looking specifically here at the 10 biggest government tax expenses, also known as expenditures. These are those cherished deductions and breaks enshrined in the tax code that save Americans billions of dollars in taxes.
Most Republicans say to cut only spending while most Democrats say cut spending, mostly, but also raise revenue. We use “revenue” because Democrats are not calling for tax increases solely but also for eliminating loopholes and tax deductions, which cut into government income, and therefore reduces what it has available to spend. Of course, spending could be sustained with a credit card, but the government would never do that.
For this slideshow, AdvisorOne used as a source an analysis by the office of Sen. Orrin Hatch, R-Utah, of the nonpartisan report by Congress' Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2010-2014,” released Dec. 21, 2010.
So, which of these 10 biggest government expenses would you cut to help reduce the deficit? Take a look and test your skills.
10) Deductions for Charitable Contributions
This is the tax benefit for donations to charities other than education and health care institutions, including donations to religious institutions. This charitable deduction represents 4% of all tax expenditures.
It's only the 10th biggest government expense, so cutting this should be easy. No one in America cares about churches and orphans—right?
9) Exclusion of Capital Gains at Death
If this one goes, death would be taxed twice. First, the decedent’s estate might get hit with the estate tax. Then the decedent’s heirs would be subject to tax again on the gain embedded in any inherited asset, should they decide to sell it. This also accounts for 4% of federal tax expenditures.
I thought the saying was "Death and taxes," not "Death and taxes ... and taxes."
8) Pre-Tax Treatment for Contributions to a 401(k)
At 4% of tax expenditures, this is a significant incentive to families and individuals to save for retirement.
And since most surveys find that Americans don't save enough for retirement anyway, this deduction is a waste of taxpayer money. Besides, we all have Social Security to rely on.
7) Deduction for State and Local Taxes
This deduction would hit high-tax states, like Massachusetts, the hardest, driving up the marginal rate of taxpayers who take this deduction by as much as 35%. It represents 5% of all federal tax expenditures.
The easy solution here would be to throw this deduction out, then have everyone move to a low-tax state. Ahhh, summer in Texas.
6) Earned Income Tax Credit
Designed for low-income people, the Earned Income Tax Credit accounts for 5% of all tax expenditures, putting more cash in the pockets of people who need it the most.
What? Help the poor? Not with my tax dollars!
5) Pre-Tax Treatment of Defined Benefit Pension Plan Contributions
This is a tax benefit that reduces the cost for those workers (and companies) who save for retirement through a traditional pension plan. It represents 6% of tax expenditures. Yes, well, see Number 8.
4) Exclusion of Medicare Benefits
Accounting for 7% of tax expenditures, its elimination would increase taxes on older Americans’ Medicare benefits.
You don't want to make Grandma angry, do you? And since seniors are one of the largest voting blocks, soon to be ballooned by Baby Boomers, good luck putting this on the chopping block.
3) Preferential Rates for Dividends & Capital Gains
Take away this tax expenditure, which accounts for 8% of tax expenses, and the rate on dividends will almost triple in less than 18 months, and the rate on capital gains will go up 59%, also in less than 18 months.
This is likely to discourage investment in stocks and bonds, generally not a good thing, but it mostly affects rich people and Wall Street fat cats—right?
2) Home Mortgage Interest Deduction
Having helped millions of Americans achieve home ownership, this deduction accounts for 9% of all tax expenditures.
Well, we could all live in tents while the housing market sorts this one out. By the way, Housing Market, how's that nationwide foreclosure situation going?
1) Exclusion for Employer-Provided Health Insurance
Representing 13% of tax expenditures, it’s the single largest government tax expenditure. To do away with this would threaten access to health care for families and individuals that have health insurance through their employers.
This is an easy one to eliminate because we now have a brand new, government-run universal health care system that President Obama ... oh, that's right, we don't. Well, good luck slashing the deficit.