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.
Standard 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 deduction amount.
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.
Amended returns 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 belated refunds.
Not all expenses are deductible
Taxpayers must be careful, however, that the deductions claimed on a return,
either the annual filing or an amended one, are allowable.
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 IRS.
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.
Credit card 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 personal expense.
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.
By Kay Bell
Bankrate.com (April 23, 2001)
