National Association of REALTORS®
Appendix: Deductions and Tax Credit
Itemized Deductions:The most widely used itemized deductions are for state and local taxes, mortgage interest and charitable contributions. Each year about one-third of taxpayers itemize their deductions; the remainder use the standard deduction. The current tax system is designed so that the “value” of a deduction (i.e., the amount by which it will reduce taxes) varies with the marginal tax rate (or tax bracket) of the taxpayer. Thus, when a taxpayer in the 35% tax bracket takes a $100 deduction, his tax is reduced by $35. Similarly, if the taxpayer is in a 28% bracket, $100 of itemized deductions reduces tax liability by $28. This result occurs because of the progressive rate structure of our tax system. This is also the reason that “the rich” are said to benefit more from itemized deductions than individuals in lower tax brackets. Two people with the same dollar value of itemized deductions but who are in different tax brackets will have different tax results from the same dollar value of deductions.
Tax Credits: Many tax economists believe that tax incentives should provide identical amounts of tax relief for each dollar spent on the particular tax incentive. Mechanically, the easiest way to achieve this result is to change deductions into tax credits. Thus, for example, if a deduction were replaced with a 20% credit, $100 spent on that incentive would reduce taxes by $20 for all taxpayers, whether they were in the top or the bottom tax bracket. The following examples use fixed dollar amounts to illustrate the impact of this change. They do not reflect the current progressive system. Assume a 20% credit in lieu of an itemized deduction amount.
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