Americans Paying Government Almost $1 Billion Too Much by Not Itemizing Their Taxes

Here's a stunning piece of news from Money Central that says Americans are over-paying their taxes by almost $1 billion simply because they don't itemize their income taxes. The details:

If you took the standard deduction on your 2006 tax return, you may want to take another look. You might have cheated yourself out of some tax savings. In fact, you may even want to look at your 2005 and 2004 returns as well.

In the past, the General Accounting Office has found that filers who used the standard deduction instead of itemizing paid the Internal Revenue Service almost $1 billion more than they should have.

Yikes!

They don't say whether this $1 billion is every year or over a series of years, but they do talk about another study that was conducted to see how much Americans over-pay their taxes. The conclusion:

The final tally: as many as 2.2 million filers erroneously paid Uncle Sam too much, by an average of $438 per taxpayer.

Who ignored deductions and paid unnecessary taxes? The GAO says it was mainly lower-income and middle-income taxpayers. Taxpayers in the $25,000-to-$50,000 income range accounted for the bulk of those who paid too much; filers earning between $50,000 and $75,000 were a close second.

Thoughts:

1. $438 is nothing to sneeze at. Even if you had to pay someone $200 to find these deductions for you, you'd still be well ahead of the game. It's one reason I use a CPA to do my taxes.

2. I'm thinking the reason many people miss deductions is that 1) they simply don't know/understand our complex tax code and 2) they want their refund quickly and easily and don't want to fill out a complicated tax return. These are two more reasons I use a CPA to do my taxes.

3. I itemize like crazy. I find a bunch of deductions and my CPA always comes up with a few I haven't thought of. Yet another reason I use a CPA to do my taxes.

Are you getting the feeling that I recommend using a CPA to do your taxes? ;-) But even if you don't want to go that far, at least get a tax software program or visit a tax preparer like H&R Block Surely these options will help you get back part of that $438.

Comments

[Suze]

We used a CPA for our taxes for a couple of years. She showed us how she itemized our deductions and then advised us to do them on our own since our returns are straightforward.

I felt that was very honest advice.

[Kenny]

Use Intuit's TurboTax, and then go to Deduction Finder. It is just AWESOME program. I have been a user of it since 1989 or 1990 when it came on those thin plastic floppy disks.

One HAS to itemize, and GRAB all those deductions since you earn $X and then bring home $Y, and then spend 80% of $Y. Some of those $Y needs to be deducted.

Do not OVERDO it since it will come and bite you. But, charity stuff, tax payments, job search, real-estate taxes etc are imp deductions to always take, and you can only take it if you itemize. Buying candy at the red light for $1 is also a charitable deduction. Now you need receipts for all $ amounts. That is a tough one, but you can always ask for a receipt at the Church or Temple.

Good habits to keep a receipts folder like we do!

KKP

The flip side is that unless one has a lot of unreimbursed work expenses, no health insurance, or an oversize mortgage, itemizing isn't necessarily a win. I did it this year, and might again next year (depending on when the refinance happens), but for '08 I almost certainly won't be...the standard deduction will be larger than all the things I could write off by itemizing. This year it only beat the standard deduction by $280, and that's because I'm paying a frankly insane amount on my mortgage.

Most of my AGI-reduction comes from Schedule C...which doesn't require itemizing in the traditional sense.