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This post is part of the Tax Policy Center’s new series, Tax Line, which digs into the data behind the day’s most pressing tax policy issues. You can read all posts in this monthly series by clicking on the topics tag, TaxLine, at the bottom of this post.
Reforming itemized deductions has been prominent in the current tax policy debate. This raises important questions: How many taxpayers itemize, and how has that pattern changed in recent years?
To reduce their taxable income, individual taxpayers have the option to claim a standard deduction or itemize deductions. Only 30 percent of taxpayers actually benefit from itemized deductions, the most common of which are for state and local taxes, mortgage interest, and charitable contributions. The other 70 percent claim the standard deduction, which is $6,300 for individual filers in 2016 ($12,600 for joint returns and $9,300 for heads of household). The standard deduction, which is indexed annually for inflation, eliminates tax liability for many low-income filers and understandably simplifies tax return preparation (see Form 1040 Schedule A).
In 2013, the share of itemizers was roughly the same as two decades before—about 30 percent. However, beginning in 1995, the share steadily increased from 29 percent to a peak of 36 percent in 2005. Since then the trend has reversed.
Source: SOI Tax Stats - Individual Income Tax Returns Publication 1304 (Complete Report), Table 1.4 and Table 2.1. Selected years, 1988 through 2013, available at https://www.irs.gov/uac/soi-tax-stats-individual-income-tax-returns-publ....
What drove the rise and fall of itemizers? A closer look at the three major deductions—for state and local taxes paid, home mortgage interest, and charitable contributions—provides some answers.
Source: SOI Tax Stats - Individual Income Tax Returns Publication 1304 (Complete Report), Table 2.1. Selected years, 1988 through 2013, available at https://www.irs.gov/uac/soi-tax-stats-individual-income-tax-returns-publ.... Real amounts are calculated using GDP deflators, available at https://fred.stlouisfed.org/series/GDPDEF.
- State and Local Taxes: Nearly all itemizers—between 98 and 99 percent—report paying some state and local taxes. A policy change in 2004 that allowed taxpayers to deduct state and local sales taxes in lieu of income taxes caused a slight increase in the number of itemizers taking this deduction.
- Home Mortgage Interest: Prior to 2006, the share of itemizers who deducted mortgage interest remained relatively constant between 81 and 83 percent. Then, the fraction steadily dropped to a low of 75 percent in 2013, consistent with the decline in homeownership following the housing bubble collapse. The amount of mortgage interest deducted by taxpayers increased sharply from 2005 to 2008. Then, the combination of falling housing values and historically low mortgage rates drove the average deduction to its lowest level.
- Charitable Contributions: The share of itemizers reporting charitable contributions declined from 91 percent in 1988 to 82 percent in 2013. Much of that drop occurred between 2005 and 2007, after Congress required a bank record or a written confirmation of cash gifts and set new rules on donations of clothing and used vehicles.
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The Internal Revenue Service Building, Wednesday, Aug. 19, 2015, in Washington. (AP Photo/Andrew Harnik)