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Tax Guide
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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.

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 (April 23, 2001)