March 8, 2023

Eight of the Largest Tax Breaks Explained

There are currently more than 215 tax expenditures, also known as tax breaks, which can take the form of exemptions, deductions, credits, and preferential rates written into the U.S. Tax code. In 2022, those breaks totaled over $1.7 trillion. To put that in perspective, that’s more than the government spends on Social Security, defense, or Medicare.

Tax expenditures should be a key part of any discussion about tax reform. Many economists believe that eliminating some or all tax breaks would benefit the economy by removing market distortions and simplifying the code.

Here are eight of the most expensive tax breaks for individuals and corporations; together, they accounted for more than two-thirds of the total annual cost of tax expenditures in 2022:

  1. Exclusion of pension contributions and earnings ($325 billion). Contributions to pension or retirement plans — such as to 401(k)s and IRAs — are not taxed as income when they are received but instead taxed in the future when the employee withdraws the funds.

  2. Reduced rates of tax on dividends and long-term capital gains ($239 billion). Income from capital gains (the profit from the sale of a property or investment) and qualified dividends (generally from shares in domestic corporations that have been held for a specified period) are taxed at a lower rate than other forms of income. Defenders argue that such preferential rates encourage the sort of investment and risk-taking that spur economic growth, but critics note that they disproportionately benefit the wealthy and encourage tax avoidance.

  3. Exclusion of employer contributions for medical insurance and care ($187 billion). The premiums that employers pay for their employees’ healthcare are exempt from federal income and payroll taxes. While this tax break benefits a wide swath of Americans by reducing the after-tax cost of health insurance, it is worth more to taxpayers in higher tax brackets than to those in lower brackets.

  4. Child Tax Credit ($185 billion). This tax credit is designed to make raising children more affordable by easing the financial burden faced by families. A portion of the credit is refundable, which means that if the total value of the credit is more than a family’s total tax liability, part of the difference is returned as a tax refund by the Internal Revenue Service. Research has shown that the child tax credit has a significant impact for low-income families.

  5. Subsidies for insurance purchased through health benefit exchanges ($76 billion). Provided to eligible taxpayers for qualified health insurance purchased through marketplaces established under the Affordable Care Act.

  6. Earned Income Tax Credit ($69 billion). This tax credit is primarily available to low-income working parents, and the credit is refundable. Research shows that the Earned Income Tax Credit encourages people to work and that recipients use the credit to cover essential costs.

  7. Exclusion of capital gains at death ($55 billion). Unrealized capital gains on assets held at the time of the owner’s death are not subject to income tax.

  8. 20-percent deduction for qualified business income ($54 billion). This tax credit deduction that allows eligible self-employed and small-business owners to deduct up to 20 percent of their qualified business income on their taxes.

Related: Infographic: How The U.S. Tax System Works

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