Itemizing deductions in itself does not increase the chances of being audited. If we reference the latest IRS statistics, the taxpayer’s income is more of a factor than whether or not they itemized. Specifically:
- Most basic tax returns with less than $200,000 in income and without any business or investment income have a 0.3% chance of being audited, or 3 out of every 1,000 tax returns are audited.
- If the taxpayer’s income is at least $200,000 for the same, the rate is 2.2%, or slightly in excess of 2 out of every 100.
- Over a $1M in income, and the rate is 7.5%.
That being said, if the taxpayer has significant itemized miscellaneous expenses in relation to their income, then that can certainly raise a red flag.
What are some common/key mistakes made regarding itemizing deductions?
One of the biggest mistakes we come across are taxpayers that fail to maintain proper documentation for charitable donations. A lot of them don’t realize that donations of $250 or more requires written acknowledgment from the charity whether the donation is in the form of property or cash.
What are some reasons or excuses you encounter for people not itemizing deductions?
Many taxpayers that use digital do-it-yourself (DDIY) tax software are so focused on completing their taxes quickly that they decide to “just claim the standard deduction.” They think it’s going to take too long to itemize instead. Others think that itemizing automatically increases their audit risk. However, that in itself doesn’t impact the taxpayer’s audit risk.
If a person doesn’t itemize deductions but later realizes they made a mistake, can they amend their taxes to itemize?
Certainly, there’s no provision in the Internal Revenue Code that precludes a taxpayer from amending their tax return because they elected to claim the standard deduction and then later decided that itemizing is more beneficial from a tax perspective. One added note, if the taxpayer filed as married filing separately, both taxpayers need to itemize if one wishes to by amending their return.
Are there any tricks to maximize deductions or the itemization game?
Yes, the taxpayer may be able to boost overall deductions for every two-year period by alternating between the standard deduction and itemizing each year. This would mean making your charitable donations and state and local tax payments in the year you itemize for the current year and pre-paying for the following year. This would effectively double your itemized deductions for the year.
Here’s the scenario. You’re married and filing jointly with eligible itemized deductible expenses of $15,000 in state income taxes, property taxes, mortgage interest and qualified charitable donations. The potential itemized deductions for the year are only marginally greater than the $12,400 standard deduction allowed for joint filers.
However, if the taxpayer claims two years’ worth of charitable donations in a single year and prepays next year’s state and local taxes by December 31, that $15,000 could increase to $20,000 plus. Suddenly, the taxpayer can deduct far more than the standard option by itemizing. In the following year, they will not be able to claim the same charitable donations and state and local taxes paid in the prior year, but they can claim the standard deduction instead. The amount available to itemize would ideally be much less than the $12,400 standard deduction. The tax savings by utilizing this approach could be in the thousands.
Do you have more tax preparation questions? If so, please contact us.