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Ranked: The Biggest U.S. Tax Breaks
This infographic is available as a poster.
This infographic is available as a poster.
Ranked: The Biggest U.S. Tax Breaks
When you go to file your taxes this year, you’ll likely be looking for ways to minimize your tax bill. Tax breaks like credits and deductions—also known as tax expenditures—could reduce what you owe. On the flip side, they also cost the government trillions of dollars in foregone revenue.
In this Markets in a Minute from New York Life Investments, we rank the top 25 tax breaks by their forecast revenue impact over the next 10 years on the U.S. government.
What Are Tax Expenditures?
Tax expenditures are provisions within federal tax laws that result in government revenue losses. They can apply to individuals and/or corporations, and include a variety of things:
- Special exclusions
- Exemptions
- Deductions
- Special credits
- Preferential tax rates
- Tax deferrals
These expenditures are required by law to be included in the federal budget, and can be viewed as an alternative to other policy options such as direct spending. It’s important to note that when the budget is developed, revenue loss estimates are based on the assumption that all other parts of the tax code remain unchanged.
Tax Breaks, Ranked by Government Revenue Losses
With this in mind, let’s take a look at which tax expenditures are the biggest. We have ranked them by how much they are projected to cost the U.S. government in lost revenue over the next 10 fiscal years.
| Provision | Projected Revenue Losses 2022-2031 |
|---|---|
| Exclusion of employer contributions for medical insurance and medical care | $3.0T |
| Exclusion of net imputed rental income | $1.7T |
| Lower tax rates on capital gains | $1.4T |
| Tax benefits of defined contribution employer plans | $1.4T |
| Deductions for charitable contributions (excl. education and health) | $890B |
| Tax benefits of defined benefit employer plans | $808B |
| Deductions for mortgage interest on owner-occupied homes | $798B |
| Deductions for nonbusiness state and local taxes | $761B |
| Step-up basis of capital gains at death | $576B |
| Capital gains exclusion on home sales | $542B |
| Child credit | $446B |
| Tax benefits of self-employed plans | $437B |
| Treatment of qualified dividends | $421B |
| Deductions for state and local property tax on owner-occupied homes | $384B |
| Reduced tax rate on active income of controlled foreign corporations | $367B |
| Exclusion of untaxed Social Security benefits | $357B |
| Exclusion of interest on public purpose state and local bonds | $345B |
| Tax benefits of individual retirement accounts | $288B |
| Credit for increasing research activities | $272B |
| 20% deduction to certain pass-through income | $261B |
| Deductions for medical expenses | $180B |
| Exclusion of life insurance death benefits | $160B |
| Exclusion of benefits and allowances to armed forces personnel | $157B |
| Deductions for charitable contributions (health) | $153B |
| Exclusion of veterans' death benefits and disability compensation | $141B |
By a long shot, excluding an employer’s medical contributions from an employee’s taxable income is the biggest tax break. Family premiums for employer-sponsored coverage have jumped 47% over the last decade, outpacing both wage growth (31%) and inflation (23%).
The lower tax rates on capital gains is also forecast to cost the government trillions in lost revenue. In fact, the Biden Administration had proposed to significantly increase the capital gains tax in order to fund their budget, though this change has not come to fruition.
Tax expenditures related to retirement plans are also costly for the government. Income exclusions and tax deferrals for defined contribution plans are expected to cost $1.4 trillion over the next decade, nearly double that of tax breaks for defined benefit plans. This reflects the long-term decline of defined benefit plans. In fact, only 20% of U.S. workers participate in a defined benefit plan, whereas 43% participate in a defined contribution plan.
The Perks of Home Ownership
Finally, many of the largest tax breaks benefit homeowners. The exclusion of net imputed rental income—the theoretical income a homeowner would receive if they rented their home—is the second largest tax break.
On their primary residence, homeowners also get a capital gains exclusion when they sell their home. However, this exclusion is capped and is not indexed to inflation. Home prices climbed 19% in 2021 according to the S&P/Case-Shiller U.S. National Home Price Index, effectively lowering the benefit of this tax break.
Finding Opportunity in Tax Expenditures
From credits to deductions, there are a number of tax breaks available to Americans. You can consider them when you are structuring an investment portfolio. For instance, if you hold assets with capital appreciation potential—like stocks—for at least a year, they are typically subject to a lower tax rate on their capital gains. Making contributions to a retirement plan will allow you to reduce your taxable income and defer taxes, subject to certain limits.
Of course, tax expenditures are in flux based on government policy at the time. By staying up to date on changes, investors can be poised to minimize their tax obligations and grow their wealth.
Markets in a Minute
The Average American’s Financial Portfolio by Account Type
From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.
The Average American’s Financial Portfolio by Account Type
Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.
In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.
Breaking Down a Typical Financial Portfolio
People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.
| Account Type | % of Financial Portfolio |
|---|---|
| Employer retirement plan | 38% |
| Bank account | 23% |
| Brokerage/investment account | 14% |
| Traditional IRA | 10% |
| Roth IRA | 7% |
| Crypto wallet/account | 4% |
| Education savings account | 3% |
| Other | 1% |
Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.
Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.
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Account Insight for Advisors
Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).
Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.
The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.
Markets in a Minute
5 Factors Linked to Higher Investor Engagement
Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?
5 Factors Linked to Higher Investor Engagement
Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?
In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.
Influences on Investor Engagement
Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.
| Factor | Investor Engagement Index Score (Max = 100) |
|---|---|
| Financial advisor relationship | Don’t work with financial advisor: 63 |
| Work with financial advisor: 70 | |
| Sustainability alignment | No actions/alignment: 63 |
| Some/full alignment: 74 | |
| Trust in AI | Low trust: 61 |
| High trust: 74 | |
| Risk tolerance | Conservative: 62 |
| Aggressive: 76 | |
| Comfort making investment decisions | Low comfort: 42 |
| High comfort: 76 |
Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.
On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.
The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).
Personalizing Experiences Based on Engagement
Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.
On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).
A New Framework for Personalized Financial Portfolio Alignment
The Average American’s Financial Portfolio by Account Type
5 Factors Linked to Higher Investor Engagement
The Top 5 Reasons Clients Fire a Financial Advisor
The Top 5 Reasons Clients Hire a Financial Advisor
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