Some Background

Table 1 ranks the top 13 US tax expenditures in fiscal year 2024, based on December 2022 estimates by the Joint Committee on Taxation (JCT). The table also shows estimates for the same tax expenditures prepared by the US Department of the Treasury for the fiscal year 2024 budget in March 2023.

Lists of the largest tax expenditures compiled from the JCT and Treasury estimates include most the same items, but there are differences in how provisions are scored between the two agencies that result in a different ranking among the largest items.  The differences come from several sources, including different projections of usage of provisions, different definition of the baseline system against which deviations are counted, and different ways of combining provisions in the tax law.

The largest and fourth largest tax expenditures on the JCT list are the benefits for tax-qualified retirement saving accounts. The tax on contributions, as well as the income earned within the accounts, is deferred until withdrawal begins at retirement. At that point, in addition to the benefits of the deferral, many taxpayers are in a lower bracket. Alternatively, some Roth retirement saving gets no deferral of tax on deposit, but complete exemption from tax of all investment returns on the saving. The revenue losses from retirement saving accounts in 2024, measured on a cash flow basis, are estimated by JCT to total $251.4 billion for employer-sponsored “defined-contribution” plans such 401(k) plans and $122.1 billion for defined-benefit plans. (Comparable Treasury estimates are $117.8 billion for defined contribution plans and $70.0 billion for defined benefit plans). JCT reports additional losses from deductible individual retirement accounts ($17.3 billion), back-loaded individual retirement (Roth) accounts ($10.0 billion), and plans for the self-employed ($14.2 billion), and a savers’ credit ($1.6 billion).

The second-largest tax expenditure on the JCT list is the preferential rate structure for capital gains and dividends ($225.1 billion in 2024), which are taxed at rates ranging from 0 to 20 percent, as compared with individual income tax rates that range from 10 to 37 percent. Treasury estimates this provision will cost $156.3 billion in 2024.

The third largest tax expenditure (an estimated $190.3 billion in fiscal year 2021 is the exclusion of employers’ contributions for employees’ medical insurance premiums and medical care. Under this provision of the tax code, contributions are excluded from an employee’s gross income, while an employer may deduct the cost as a business expense.  Treasury estimates this provision will cost $252.4 billion in 2024.  JCT’s estimate of this tax expenditure is smaller than Treasury’s estimate because JCT assumes that, absent the exclusion of employer contributions, individuals would claim a larger itemized deduction for the higher health insurance costs they would incur.

The fifth-largest tax expenditure is the credit for children and other dependents ($119.9 billion in 2024,). The 2017 Tax Cuts and Jobs Act (TCJA) doubled the child credit to $2,000 per qualifying child, increased the maximum refundable credit amount to $1,400, raised the income at which the credit begins to phase out to $400,000 for joint returns ($200,000 for single), and introduced a new $500 credit for nonchild dependents.  Treasury  estimates these credits (including the refundable portion) will cost $109.5 billion in 2024. The TJCA increases in the child credit will expire after 2025.

The sixth-largest tax expenditure is the subsidy for health insurance purchased through health benefit exchanges under the Affordable Care Act ($79.9 billion). Treasury estimates this subsidy, including the refundable portion, will cost $47.3 billion in 2024.

The seventh-largest tax expenditure, the earned income credit ($73.0 billion in 2024), mainly benefits low-income families with children. The credit increases with family size and is phased out as income rises above a threshold amount. Most of the credit’s budgetary cost comes from the portion that exceeds income tax liability and is therefore counted as outlays, rather than as a tax expenditure, in the Treasury estimates. (JCT’s presentation combines the revenue loss and outlay effect.) Including the outlay costs, Treasury estimates the EITC increases the budget deficit by $66.9 billion in 2024.

The eighth largest subsidy is the exclusion of capital gains on assets transferred at death or by gift.  Assuming that the alternative treatment is taxing unrealized capital gains on the decedent’s final income tax returns, JCT estimates this proposal will cost $59.7 billion in fiscal year 2024, while Treasury estimates it will cost $51.9 billion.

The ninth-largest subsidy is the 20 percent deduction for qualified business income of individual taxpayers ($59.3 billion in 2024). This deduction, introduced by the TCJA for tax years beginning in 2018, is available to individuals with income from self-employment and ownership of shares in pass-through businesses (partnerships and subchapter S corporations) but is partially limited for high-income individuals according to complex criteria based on the types of activities from which they earn income, the wages they pay to their employees, and the amount of capital they own.  Treasury estimates it will cost $50.8 billion in 2021. The deduction is scheduled to expire after 2025.

The tenth largest subsidy is the deduction for charitable contributions, which the agencies report as three separate items – charitable contributions for education, charitable contributions for health, and charitable contributions for all other purposes. Adding up the estimates for these three items, JCT estimates the charitable deduction will cost $55.4 billion in 2024, while Treasury estimates it will cost $82.2 billion.

The eleventh-largest tax expenditure is the exclusion of untaxed Social Security and railroad retirement benefits ($50.6 billion). These benefits are partially or fully excluded from adjusted gross income for taxpayers whose incomes fall below threshold amounts.  Treasury estimates the cost at $31.7 billion in 2024.

In general, tax expenditures for individuals are larger than tax expenditures for businesses. Only one business tax expenditure made it into the list of the top 13: the reduced tax rate on active income of controlled foreign corporations, which is the twelfth largest tax expenditure and will cost $46.3 billion in fiscal year 2024, according to JCT. Treasury scores this proposal as costing a smaller amount ($35.1 billion) because Treasury counts as an offset the gain in revenue from a transition tax on profits accrued prior to enactment of the TCJA.

The thirteenth largest tax expenditure is the exclusion of capital gains from the sale of a principal residence.  Under current law, for a principal residence held for two years or more, only the gain in excess of $250,000 for individuals and $500,000 for couples is subject to tax.  JCT estimates this exclusion will cost 42.1 billion in fiscal year 2024, while Treasury estimates it will cost $52.3 billion.

Finally, one large item ($135 billion in 2024) is on the Treasury list, but not the JCT list – the exclusion of net imputed rental income from owner-occupied homes.  Treasury counts this as a tax expenditure because it allows taxpayer to exclude from tax the return they receive (net of interest and maintenance costs) from equity in their homes in the form of not making rent payments. JCT regards this exclusion as an administrative necessity and does not count it as a tax expenditure.

Updated January 2024