Think Twice Before Taking that 'Standard Deduction'

$473 Million: Was some of This I.R.S. Money Yours? (Too Bad.)

Dear Friends,
I hope I’ve got your attention.

At the request of Congress, four years ago the General Accountability Office (GAO) studied 1998 tax returns to find out whether people over-paid their federal income taxes. The answer was a resounding most definitely.

And it all came down to one simple reason: when figuring their income taxes these individuals opted for the easy way out and chose to take the ”standard deduction” instead of itemizing.

The GAO estimates this resulted in a higher tax bill on as many as 2.2 million returns that year. The conclusion:

“We estimate that these taxpayers with un-itemized mortgage interest, mortgage points, and state and local income taxes that exceeded the claimed standard deduction for their tax filing status are likely to have overpaid their taxes by about $473 million.”

Guess what? No refunds are in the mail. That’s because it’s not the government’s job to calculate your taxes. That’s something you’re responsible for. Under our “voluntary compliance” system it is presumed you have done this correctly unless an audit indicates otherwise. Unless your tax return is selected for an audit, the government accepts the number you come up with.

For 2005, the standard deduction for a “single” taxpayer increased to $5,000; double that amount for married couples who file jointly. It’s $7,500 if you file as “head of household. You get an extra amount if you are over age 65 and/or legally blind. Note: If you file as “married/separately” the standard deduction for each person is $5,000. However, if one spouse chooses to itemize his/her deductions instead, the other must also itemize.

If you choose to itemize your deductions, you must file your federal income tax using Form 1040. You will list your deductions on “Schedule A,” which should be attached to your return. All forms can be downloaded from the I.R.S. website:

In 2004 two out of every three taxpayers chose to take their “standard deduction” and save some time. That’s your choice. But there’s a good chance it’s going to cost you.

Got Kid(s)?

One reason our tax code is so complex is that it wasn’t all written at the same time. Instead, Congress adds a section here, amends a provision there, and the next thing you know you’ve got a patchwork quilt with different-sized squares.

Take the definition of “child.” You’d think that would be pretty straight-forward. But, until 2005 there were several different definitions depending upon which section of the tax code you were dealing with.

Thankfully, the confusion has been eliminated. As of the 2005 tax year, there is now one uniform definition of “qualifying child,” whether you’re talking about head-of-household status, education credits, the Earned Income Tax Credit, etc.

CCH, a national provider of tax information and software, says than in order to meet the definition of “qualifying child,” all three of the following conditions must be true:
-- The child lives in the same household as the taxpayer for more than half a year
-- The child has a certain relationship to the taxpayer: a son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any of the above individuals, as well as a child placed by an adoption agency or a legally placed foster child
-- The child has not reached a specified age. This will vary depending upon the tax break.

Major change! The old test that the taxpayer must provide more than half the child’s support has been eliminated.

Got W-2?

If you were employed in 2005 you need a W-2 in order to complete your tax return. This form lists your annual earnings and the taxes withheld. By law, an employer must provide this no later than January 31st of the following year. Since most companies mail out W-2s it can take few extra days to get into your hands.

However, if you haven’t received yours yet, it’s time to take some action. The first thing you should do is contact your employer. There’s always a chance your W-2 got lost in the mail.

If your employer is giving you a hard time and you still don’t have your W-2 by February 15th, the I.R.S. can help. Call: 1-800-829-1040. Be ready to provide them with the following information:
-- Your name, address, phone number, and Social Security number.
-- Your employer’s name and complete address, phone number, and, if possible, tax I.D. number
-- As estimate of the wages you earned, taxes paid, the time period your employment spans.

Hit by Katrina?

In the weeks and months following the devastating hurricanes that struck New Orleans and the Gulf Coast, Congress passed several major pieces of legislation aimed at helping individuals and businesses recover.

For instance, normally you cannot deduct the full amount of any property or theft losses you suffer. However, if this occurred after August 24, 2005 and in the declared Katrina disaster area, the entire amount is deductible. To claim a loss, you have to itemize by filling out Schedule A.

Here’s an interesting twist that could save you some extra money: Because Katrina-related losses were caused by a natural disaster, you have the option of deducting your losses against on your 2004 taxes instead of on your 2005 return. Doing so requires filing an amended return for 2004. (Note: the I.R.S. recommends writing “Hurricane Katrina” in red in at the top of your amended 2004 return for faster processing.)

I strongly recommend you have a tax advisor run some basic calculations to see which year would give you the greatest tax savings.

You can tap into a wealth of information about Hurriane Katrina tax relief by typing “Katrina” into the search box at

Nina, We Love You!

Here’s my annual plea to send Nina Olson a Valentine. OK, I get that 99.9 percent of you have never heard of her, much less met her. But, trust me, she is arguably one of the ten most important women in your life.

Olson is our National Taxpayer Advocate. She’s the champion of the little guy -- you and me. She is legally responsible for taking the I.R.S. and Congress to task for making our tax system less taxpayer-friendly than it ought to be. By law, each year Olson has to report to Congress on the 20 most-serious issues individual taxpayers face.

This year, Olson’s criticism encompassed the entire tax code which, she said, is so complex that “it creates opportunities for taxpayers to make inadvertent mistakes as well as to game the system.” The latter causes Congress to pass more tax laws to close loopholes, which leads to greater complexity and confusion, which leads to more “gaming the system,” and so forth. It’s an endless cycle.

She called on Congress to overhaul and simplify the tax code, listing six principles that should guide the process. These include such revolutionary concepts as making tax compliance so simple ordinary Americans can actually do their own taxes -- imagine that! Principle #6 calls for periodically reviewing each provision of the tax code to ensure it still makes sense, something Olson referred to as a “sanity check.”


Last year numero uno on Olson’s list of the most serious flaws in our tax system was the Alternative Minimum Tax. This year, she said the most serious issue is the fact that the I.R.S. has cut back on taxpayer services while expanding its enforcement efforts.

For instance, you may have noticed that you can no longer file your taxes by telephone. In addition, there have been “substantial” cuts in the amount of taxpayer education provided to small businesses. Olson also reports that the I.R.S. “significantly reduced the number of returns that I.R.S. personnel prepare for taxpayers who seek…assistance,” and cut back on the number of taxpayer phone calls I.R.S. operators have to handle.

To read more about what Olson thinks needs to be addressed to improve the federal income tax system, click here.

Hope this helps!

If you have a question for Gail Buckner and the Your $ Matters column, send them to: , along with your name and phone number.