Many people like to stand out in a crowd, to have something a little different that’s out of the ordinary. Whether it’s the car they drive, a certain attire, or even a favorite hobby – most people like to feel special – to have or do something unique that is just a little different from everyone else. Yet when it comes to IRS, there seems to be a consensus about just being a faceless part of the crowd.
I cannot count the times I have heard clients express concerns about calling attention to their tax return. “We will just leave it off if you think it will throw up a red flag.” Boy, I would like to think the Service has run out of “Red Flags” by now, but the truth is they probably have not. So what actually throws up a Red Flag?
Well, there are a few things that come to mind; I’ll share a couple. These are preparation mistakes that likely come from an inexperienced tax return preparer. If you think about it, all of us would probably know better.
- Claiming a loss on the sale of your principal residence – Maybe not such an obvious oversight, but consider the fact that gains up to $500,000 can be excluded from income for a married couple. Since most sellers are not required to pay taxes on their gain, you might expect that losses are not allowed – the old theory of just being too much of a good thing.
- The value on items donated to charity is too high – More taxpayers probably struggle over this issue than any other. While there are a few exceptions, generally the value claimed on your tax return should not be more than what you paid for an item, and usually it should be quite a bit less. Let’s face it – that computer that you just donated to your kid’s school is not worth more than you paid for it 3 years ago. And even if it was, your deduction is typically limited to what it cost you. (Some exceptions)
While deduction amounts outside of the average will not necessarily throw up the dreaded Red Flag, you might like to know the average amount deducted on tax returns filed across the country.
2007 Average Deductions Claimed Based on Adjusted Gross Income
Adjusted Gross Income in Thousands of Dollars
AGI $0-15 $15-30 $30-50 $50-100 $100-200 $200-250 $250 & up
----- ------ ------ ------- -------- -------- ---------
Medical 7,402 6,849 6,040 6,690 9,922 22,810 32,813
Taxes paid 2,777 2,959 3,623 5,822 10,370 17,013 49,370
State &
local tax* 760 1,006 1,606 3,053 6,015 10,868 39,454
Income
taxes only 1,204 1,211 1,836 3,428 6,760 12,208 45,945
Gen. sales
tax only 506 741 1,049 1,631 2,397 3,297 4,727
Contrib 1,387 1,931 2,127 2,612 3,790 5,733 23,817
Interest 9,850 9,102 9,262 10,558 13,766 18,030 28,110
Total itemized (after
limitation) 15,431 15,062 16,013 19,937 28,380 39,542 91,046
* State and local taxes are the total of both income taxes and general sales taxes.
These averages were computed from IRS’s latest available statistics.