Only 32 percent of all federal income tax filers itemized their deductions in 2011, the latest data at the time of publication [source: Lowry]. For the majority of Americans, the standard deduction offers a better deal than itemizing. They simply don't have enough deductible expenses to add up to more than $6,200 for an individual or $12,400 for a married couple filing jointly.
In some cases, though, taxpayers mistakenly choose the standard deduction when they could have saved more with itemized deduction. The General Accounting Office analyzed tax returns from 1998 and found 948,000 cases in which people paid Uncle Sam nearly $1 billion too much by failing to itemize.
Looking at the numbers, though, it's clear that itemizing deductions makes the most sense to higher-income earners who generally pay more for deductible expenses like mortgage interest, state and local taxes, charitable donations and medical expenses.
A 2014 report by the Congressional Research Service found some interesting data on who itemizes in America:
- Only 6 percent of households earning $20,000 or less itemized in 2011.
- 55 percent of households earning $50,000 to $100,000 itemized their returns.
- 94 percent of households earning $200,000 to $250,000 itemized.
Perhaps not surprisingly, the highest income earners claimed an outsized number of deductions in 2011 [source: Lowry]:
- Households earning $50,000 to $100,000 filed the greatest number of itemized returns (36.5 percent) but only claimed 27 percent of total deductions.
- Households earning $250,000 to $500,000 filed 4.4 percent of itemized returns and claimed more than twice that amount (9.1 percent) of total deductions.
- Households earning more than $1 million only filed 0.6 percent of itemized returns but claimed 10.7 percent of total deductions.
The American Taxpayer Relief Act of 2012 reinstated the limit on itemized deductions for high-income earners (known as the Pease limitation) in order to retain more tax revenue from the wealthiest Americans, who are far more likely to itemize.
For lots more information on income taxes and personal financial planning, check out the related HowStuffWorks articles below.
Author's Note: How Itemized Deductions Work
When it comes to filing taxes, I am a walking red flag. First of all, I'm self-employed, which automatically makes me suspicious to the IRS. To make it worse, I claim the home office deduction, I earn some of my income from outside the United States, and I itemize my deductions. I put a lot of trust in tax software to keep me honest and flag any questionable deductions. To be honest, I'm so terrified of an audit that I'm more likely to cheat myself out of deductions than cheat Uncle Sam. Not to mention I make so little money that it's hardly worth the IRS's trouble to hunt me down.
- Eisenberg, Richard. "IRS Audits: Your Odds and Best Strategies." Forbes. April 16, 2013 (Oct. 21, 2014) http://www.forbes.com/sites/nextavenue/2013/04/16/irs-audits-your-odds-and-best-strategies/
- Government Accountability Office. "Further Estimates of Taxpayers Who May Have Overpaid Federal Taxes by Not Itemizing." March 29, 2002 (Oct. 21, 2014) http://www.gao.gov/products/GAO-02-509
- Internal Revenue Service. "Itemized Deductions." (Oct. 21, 2014) http://www.irs.gov/instructions/i1040sca/ar01.html
- Internal Revenue Service. "Limit on Itemized Deductions." (Oct. 21, 2014) http://www.irs.gov/publications/p17/ch29.html
- Internal Revenue Service. "Standard Deduction." (Oct. 21, 2014) http://www.irs.gov/publications/p17/ch20.html#
- Lowry, Sean. "Itemized Tax Deductions for Individuals." Congressional Research Service. Feb. 12, 2014 (Oct. 21, 2014) http://fas.org/sgp/crs/misc/R43012.pdf
- Sit, Harry. "Tax Deductions: Above-the-line, Standard, Itemized, and Miscellaneous." The Finance Buff. Feb. 18, 2009 (Oct. 21, 2014) http://thefinancebuff.com/tax-deductions-above-the-line-standard-itemized-and-miscellaneous.html