The Wall Street Journal
In recent months, the Internal Revenue Service has been aggressively cracking down on abusive tax shelters. But millions of Americans face a different problem: They don’t deduct enough.
New data, based on Internal Revenue Service statistics, show total average itemized deductions of around $25,000 for taxpayers earning between $100,000 and $200,000 a year. That includes about $11,000 in deductions for interest payments and about $3,700 for charity.
For taxpayers raking in $200,000 or more, the average interest deduction was $22,598.
While that may sound like a lot, it isn’t. Tax experts say many Americans are routinely failing to take deductions they’re entitled to, thus overpaying their taxes by billions of dollars collectively. Chalk it up to ignorance, fear or both. Many people are so confused by tax laws or so frightened by the threat of an audit that they fail to take perfectly legal write-offs.
The new statistics on deductions were prepared by Jim Seidel of RIA, a New York-based publisher of tax and other business information. The data, based on returns for 2000, can help taxpayers determine if they are taking enough deductions. If your deductions are way below average for your income group, you may have neglected to include some important write-offs you are entitled to take.
One common oversight: Some who run a business out of their house don’t take a home-office deduction because they fear it is a red flag for the IRS. Others forget to deduct job-search expenses. And one million or more Americans overpay their taxes by taking the "standard" deduction (a flat amount based on your filing status) instead of itemizing, a recent government study found.
For those who omitted a deduction, there’s an easy solution: File Form 1040X to amend your return.
If your deductions are way above the average, take a fresh look at your return to make sure it is bulletproof. Even if you have all the evidence to support an IRS challenge, consider attaching a note of explanation for such items as heavy medical expenses or huge charitable contributions, said David A. Lifson, a certified public accountant at Hays &Co. in New York. One red flag is claiming large amounts of charitable contributions compared with your income.
Failing to take adequate deductions is surprisingly widespread. "Many of these people just don’t bother to keep the records necessary to establish or document deductions they qualify for," said Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan Business School in Ann Arbor.
The average total deductions for people who itemized for 2000 was $18,777. That was a 4.5 percent increase from the year before, said RIA’s Seidel.
Of course, you may have very different circumstances than the average for your group. You may live in an area with high state and local taxes, or you may face unusually large medical bills. Even so, the numbers are worth studying.
Figuring out the maximum legal deduction, however, isn’t always easy. Among the trickiest items are valuations of used books, clothing and furniture donated to charity.
One solution is to check prices of comparable items on eBay, the online auction firm (www.ebay.com). Another is to buy special software called "ItsDeductible" (www.itsdeductible. com), which estimates market value of about 1,000 household items in good, fair and poor condition. The software maker says estimates are based on visits to thrift and consignment shops around the nation. An advantage to using this approach is that you have details to cite in case of an audit.
Just because the IRS may scrutinize a deduction closely doesn’t mean it should be avoided. Only about two million returns claim the home-office deduction even though tax advisers say far more people are eligible. The key to this deduction is good record keeping and a mastery of the mind-numbing details in IRS Publication 587. (See www.irs.gov.)
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