Limiting Tax Deductions: What It Might Cost You

Limiting Tax Deductions: What It Might Cost You

Businessman on edge of cliff

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There are many reasons to argue against the “deduction solution” to the “fiscal cliff.”

Some, like former Treasury secretary Robert Rubin, say simply capping tax deductions is not politically realistic and wouldn’t raise much revenue.

Others argue that President Barack Obama ran on hiking the tax rates for the wealthy and won, so therefore he has a mandate.

Some say that limiting deductions wouldn’t be as “fair” or progressive as a straight tax-rate hike.

But a detailed analysis of tax deductions shows that the wealthy would bear the brunt of any cap on deductions, with million-dollar earners getting hit the hardest.

There is no concrete plan for the deduction solution. It could involve further limiting certain deductions, like taking the mortgage-interest deduction cap to $ 500,000 rather than $ 1 million. Or it could involve a percentage cap or a dollar cap. (Read more: Voters Punished Rich Candidates on Election Night)

An analysis by the Tax Policy Center looks at the dollar impact of certain caps on deductions. If total deductions are capped at, say, $ 25,000, people making $ 1 million or more would bear the brunt of the new taxes. They would, in fact, account for 45 percent of the tax change.

Their taxes would go up by an average of $ 97,524, compared to current tax policy.

Tax filers making between $ 500,000 and $ 1 million a year would see their taxes go up by an average of $ 14,000.

As for who would really pay the new revenues, the study found that people making more than $ 200,000 a year would account for 71 percent if the increase. (Read more: Wealthy Dump Assets Ahead of “Fiscal Cliff”)

Middle-income Americans would see little or no change. Those making between $ 40,000 and $ 50,000 would see their taxes go up an average of $ 790.

The average tax increases are similar if deductions are capped at $ 50,000. But with a $ 50,000 cap, those making $ 200,000 or more account for more than 90 percent of the tax change.

As for the total revenue collected, if deductions are capped at $ 25,000, tax revenues would increase by $ 1.3 trillion over the next 10 years, starting at $ 70 billion in 2013.

Pretty soon you’re talking real money – even in deficit terms.

-By CNBC’s Robert Frank
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