Revenues
Limit the Value of Itemized Deductions
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Revenues | |||||||||||||
| Limit the tax benefits of itemized deductions to 28 percent of their total value | 6 | 12 | 13 | 14 | 14 | 15 | 16 | 16 | 17 | 18 | 58 | 139 | |
| Limit the tax value of itemized deductions to 6 percent of adjusted gross income | 3 | 6 | 6 | 7 | 7 | 7 | 7 | 7 | 7 | 7 | 29 | 64 | |
| Limit itemized deductions to $500,000 for joint filers ($250,000 for all others) | 5 | 10 | 11 | 11 | 12 | 12 | 13 | 13 | 14 | 14 | 48 | 113 | |
Source: Staff of the Joint Committee on Taxation.
Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections.
When preparing their income tax returns, taxpayers may either choose the standard deduction—which is a flat dollar amount—or choose to itemize and deduct certain expenses, such as state and local taxes, mortgage interest, charitable contributions, and some medical expenses. The tax code imposes some limits on the amount of itemized deductions that taxpayers can claim. For example, the total value of certain itemized deductions is generally reduced by 3 percent of the amount by which a taxpayer’s adjusted gross income exceeds a specified threshold. (Adjusted gross income includes income from all sources not specifically excluded by the tax code, minus certain deductions.) That limit, originally proposed by Congressman Donald Pease, is often called the Pease limitation.
This option considers three alternative approaches that would replace the Pease limitation with broader restrictions on the total amount of itemized deductions that taxpayers are allowed to take. The first alternative would limit the tax benefits of itemized deductions to 28 percent of the deductions’ total value. The second alternative would limit the tax benefits of itemized deductions to 6 percent of a taxpayer’s adjusted gross income. The third alternative would limit itemized deductions to $500,000 for married taxpayers who file joint returns and $250,000 for other taxpayers, with those thresholds adjusted, or indexed, for inflation.