Federal tax expenditures — the deductions, exclusions, credits, and preferential rates written into the tax code — primarily benefit higher-income households, investors, homeowners, corporations and pass-through business owners, and workers with generous employer-sponsored benefits. The reason is structural: most of these provisions deliver larger dollar savings as income, asset holdings, or tax brackets rise. Four provisions alone are projected to cost the Treasury more than $740 billion in fiscal year 2026, and the biggest slices flow to the top.1U.S. Department of the Treasury. Tax Expenditures A smaller set of provisions, chiefly refundable credits, works in the opposite direction and targets low- and moderate-income families.
Why Deductions Tilt Toward High Earners
The mechanics matter here. A deduction removes a dollar from taxable income, so its cash value depends on the taxpayer’s bracket. Someone in the top 37 percent bracket saves $370 for every $1,000 deducted. Someone in the 12 percent bracket saves $120 on the same deduction. Tax analysts call this the “upside-down” effect. It isn’t an accident of any single provision; it’s what happens when you pair deductions with graduated rates.
Itemized deductions widen the gap further because higher earners are the ones who use them. The standard deduction for married couples filing jointly reaches $32,200 in 2026, and only about 10 percent of taxpayers itemize because most people’s deductible expenses don’t clear that bar.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 20263Tax Policy Center. What Are Itemized Deductions and Who Claims Them The itemizers tend to be households with large mortgages, substantial charitable giving, or significant state and local tax bills, and those expenses correlate closely with high income.
Charitable contributions under Section 170 show the pattern clearly.4Office of the Law Revision Counsel. 26 USC 170 – Charitable Etc Contributions and Gifts A family earning $500,000 that donates $30,000 gets a deduction worth $11,100 at the 37 percent rate. A family earning $60,000 that donates $1,000 gets $120 back. Both gifts help their recipients, but the tax subsidy per dollar given is much larger for the higher-income donor.
Investors and People Who Own Assets
The preferential rate on long-term capital gains is one of the costliest tax expenditures in the federal budget, estimated at $135 billion in fiscal year 2026.1U.S. Department of the Treasury. Tax Expenditures Under Section 1(h), profits from selling assets held more than a year are taxed at 0, 15, or 20 percent instead of ordinary income rates that top out at 37 percent.5Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Qualified dividends receive the same treatment. That gap can amount to a 17-percentage-point discount on investment income compared to wages, and because stock and business ownership is concentrated among affluent households, the benefit follows the ownership.
In 2026, a single filer doesn’t reach the 20 percent capital gains rate until taxable income exceeds $545,500. Below that threshold, long-term gains are taxed at 0 or 15 percent while wages climb through graduated rates that can hit 37 percent above $640,601. A person earning $200,000 in salary faces a higher marginal rate on their labor than someone collecting $200,000 in investment returns, even though the two dollars represent the same economic gain.
One boundary is worth noting for high-income investors. The Net Investment Income Tax adds a 3.8 percent surtax on investment earnings once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.6Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Even with the surtax, the combined top rate on long-term gains lands at 23.8 percent, still well below the top rate on ordinary income.
Homeowners and Real Estate Owners
Homeownership is one of the most tax-favored activities in the federal code, and the benefits concentrate among higher-income owners. The mortgage interest deduction under Section 163(h) lets itemizers deduct interest on up to $750,000 of home acquisition debt.7Office of the Law Revision Counsel. 26 USC 163 – Interest To claim it, you need enough total deductions to itemize, and the deduction’s value rises with your bracket. A household in the 37 percent bracket saves about $0.37 for every dollar of mortgage interest paid. A household in the 12 percent bracket saves $0.12. Renters get nothing.
Section 121 adds the home sale exclusion. An individual can exclude up to $250,000 in gain when selling a primary residence, and married couples filing jointly can exclude up to $500,000, provided they lived in the home for at least two of the five years before the sale.8Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence Homeowners in high-appreciation markets routinely realize gains near or at those caps, sheltering hundreds of thousands of dollars from tax. Owners in flat or declining markets have little gain to exclude.
Itemizers can also deduct state and local taxes, though the current cap limits the deduction to roughly $40,000 for most filers, with a phaseout above $500,000 of income for married couples. The deduction still primarily benefits upper-income homeowners who pay significant property and state income taxes.
Corporations and Pass-Through Business Owners
Businesses have their own set of tax expenditures, and the largest firms tend to capture the most value. The research credit under Section 41 provides a credit equal to 20 percent of qualified research spending above a base amount.9Office of the Law Revision Counsel. 26 US Code 41 – Credit for Increasing Research Activities Any qualifying business can claim it, but the biggest beneficiaries are major technology and pharmaceutical firms with research budgets in the billions and the accounting staff to document every eligible expense. A small business doing modest development may qualify, but the dollar amounts are a fraction of what the largest claimants receive.
Accelerated depreciation under Section 168 lets businesses write off equipment and other capital investments faster than the assets actually wear out.10Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System A factory buying $50 million in machinery can deduct the full cost well before the equipment reaches the end of its useful life. Capital-intensive industries — manufacturing, energy, telecommunications — capture the deepest immediate benefits because they own the most physical assets.
Pass-through owners get their own break. Section 199A allows a deduction of up to 20 percent of qualified business income from partnerships, S corporations, and sole proprietorships.11Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income A business owner with $400,000 in qualifying income can deduct up to $80,000 before computing tax. Wage earners get nothing from this provision. Income limitations restrict the deduction for service-based businesses above about $403,500 for joint filers in 2026, but owners of non-service businesses face no such ceiling.
Workers With Employer-Sponsored Benefits
The single largest tax expenditure in the federal budget is one most people never think about: the exclusion of employer-provided health insurance from income. It’s projected to cost $296 billion in fiscal year 2026, more than the capital gains preference and the mortgage interest deduction combined.1U.S. Department of the Treasury. Tax Expenditures Under Section 106, premiums your employer pays toward your health coverage are not counted as taxable income.12Office of the Law Revision Counsel. 26 USC 106 – Contributions by Employer to Accident and Health Plans If your employer contributes $15,000 a year toward your family plan, that $15,000 never appears on your W-2 and never faces income or payroll tax.
This exclusion reaches deeper into the middle class than most tax expenditures because employer coverage is common among middle-income workers. The dollar value still tilts upward, though: higher earners tend to have more generous plans, and the savings per dollar excluded is larger in the 32 percent bracket than the 12 percent bracket. Part-time, gig, and lower-wage workers without employer-sponsored coverage receive zero benefit.
Employer-sponsored retirement plans work the same way. In 2026, employees can defer up to $24,500 into a 401(k), rising to $32,500 for those 50 and older and up to $35,750 for ages 60 through 63.13Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Each dollar deferred escapes current income tax, and growth inside the account compounds tax-free until withdrawal. The Treasury estimates defined contribution plans will account for $156 billion in foregone revenue in fiscal year 2026.1U.S. Department of the Treasury. Tax Expenditures A high earner deferring the maximum at a 37 percent rate shelters $9,065 from current tax. A mid-range earner deferring $5,000 at 22 percent saves $1,100.
Traditional IRA contributions follow similar rules, with a 2026 limit of $7,500 and phaseouts for workplace-plan participants that scale by filing status.13Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The broader point holds: the retirement tax expenditure favors households with enough discretionary income to save meaningfully in the first place.
Where Low- and Moderate-Income Families Fit In
Not every tax expenditure runs upside-down. Refundable credits are designed to help lower-income households, and two of the largest work in the opposite direction from deductions: they deliver their biggest benefits at the bottom of the income scale and phase out as income rises.
The Earned Income Tax Credit for 2026 reaches a maximum of $8,231 for families with three or more qualifying children, with income limits extending to $70,224 for married couples filing jointly in that category.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Workers with one child can receive up to $4,427, and those with no children get a much smaller maximum of $664. Because the credit is refundable, eligible families receive a payment even when they owe no federal income tax.
The Child Tax Credit provides up to $2,200 per qualifying child in 2026 for most families, with the refundable portion capped at $1,700 per child. The credit begins to phase out at $200,000 of income for single filers and $400,000 for joint filers.14Internal Revenue Service. Child Tax Credit The refundable portion requires at least $2,500 in earned income, and families below that threshold receive nothing from the refundable piece.
These credits are a real counterweight to the upward tilt of the rest of the code. In raw dollars, though, they are far smaller than the provisions benefiting higher-income groups. The employer health insurance exclusion alone, at $296 billion, outweighs the combined cost of the EITC and Child Tax Credit. The tax code’s architecture still directs its largest benefits toward those who earn the most, own the most assets, and have the most complex finances to optimize.