Many standard-deduction filers
pay too much tax
If you take the standard deduction on
your tax return, you could be overpaying Uncle Sam.
That was the case for half-a-million
payers of 1998 taxes. Critics of the tax laws say it's a safe bet
that's true for today's filers, too.
The General Accounting Office,
in a report sent to Capitol Hill just days before the 2001 tax-filing
deadline, found that filers of 1998 returns who used the standard
deduction instead of itemizing paid the Internal Revenue Service
about $311 million more than they should have. On average, the excess
tax payment was $610 per taxpayer.
House Majority Leader Dick Armey
asked the auditing agency to look into the issue of taxpayers cheating
themselves by claiming the standard deduction instead of itemizing
expenses. Filers have a choice of which deduction method they use
to reduce their taxable income. The standard deduction is established
each year, based on a taxpayer's filing status. Itemized deductions
rely on allowable expenses that a taxpayer reports on Schedule A.
Tax law lets taxpayers claim whichever amount is larger.
But on the 1998 returns examined
by the GAO, filers didn't necessarily think bigger was better. Some
in Congress suspect that's still the case now. IRS statistics regularly
show itemizing filers in the minority, with most taxpayers opting
for the simpler standard deduction. Armey says that attitude shows
just how tax-code complexity cheats taxpayers, with many preferring
to trade tax refunds for less filing frustration and paperwork.
deduction most popular
The auditing office looked at the three-year-old returns because
that year was the most recent for which the IRS had complete data.
Almost 125 million individual returns were filed then, with 70 percent
opting for the standard deduction.
Of those, the GAO focused on filers
who had mortgage interest they could have claimed as an itemized
expense. More than 500,000 of these taxpayers could have saved money
because their mortgage interest alone was greater than the standard
James White, director of tax issues
for GAO, notes that his office "did not attempt to determine
the reasons why taxpayers claimed the standard deduction when they
might have paid less tax had they itemized deductions."
The GAO plans a further study of
taxpayers who had additional expenses, not just mortgage interest,
to itemize. This includes state and local taxes, property taxes
and charitable contributions. Those added amounts should increase
the number of filers who overpaid their taxes by using the standard
deduction, reports White.
could pay off
But there's still time for some filers who cheated themselves
to recoup their money.
The IRS allows a three-year period
in which an amended return can be filed. Since the 1998 returns
were filed in April 1999, the amending timetable runs until next
year's tax-filing deadline. Taxpayers also still can amend 1999
returns (filed in 2000) or just-filed 2000 returns if they used
the standard deduction but would have been better off itemizing.
These taxpayers might even find
a few more overlooked itemized expenses that could get them larger
Not all expenses
Taxpayers must be careful, however, that the deductions
claimed on a return, either the annual filing or an amended one,
A new deduction wrinkle has appeared
thanks to the increasingly popular method of paying taxes by credit
card. Some taxpayers think the processing fee associated with these
payments should be a deductible itemized expense. Not so, says the
Itemizing taxpayers can count tax
preparation costs on line 21 of Schedule A as part of miscellaneous
deductions. Acceptable expenses include fees paid to an accountant
or other professional tax preparer. Taxpayers also routinely itemize
the cost of tax software programs and tax-filing guides. And the
costs connected with collection efforts or contesting a tax bill
also can be deducted. All these go toward reaching the 2-percent-of-adjusted-income
threshold a filer must meet to deduct miscellaneous expenses.
charges don't count
Some filers want to include the 2.5-percent processing fee
charged by the private firms that process tax credit card payments
for the IRS. That fee can run into the hundreds of dollars for filers
with big tax bills, an amount that would greatly improve a taxpayer's
chance of meeting the income deductibility threshold.
When IRS employees began getting
questions about the acceptability of this deduction from the public,
they asked agency attorneys for advice. Unfortunately for filers,
the answer was loud and clear and negative.
An IRS memo on the issue notes
while the tax code allows as a deduction "all the ordinary
and necessary expenses paid or incurred during the taxable year
in connection with the determination" of a taxpayer's bill,
the processing fee for credit payment does not fall in that category.
This charge is not part of a taxpayer's bill or related to figuring
out that amount, argues the IRS, and therefore is a nondeductible
Or, as an agency spokesman put
it, the cost of figuring out your correct tax is deductible; the
cost of paying your taxes is not.
-- Posted: April 23, 2001