Didn't itemize? You may be overpaying IRS

By Bankrate.com

Before you take the standard deduction on your 2007 tax return, take another look. You might be cheating yourself out of some tax savings. In fact, you may even want to look at your 2006 and 2005 returns as well.

In the past, the General Accounting Office has found that filers who used the standard deduction instead of itemizing paid the Internal Revenue Service almost $1 billion a year more than they should have.

Taxpayers have a choice of which deduction method they use to reduce taxable income, standard or itemized. They may claim whichever amount is larger.

The standard deduction amount is established annually. It is based on a taxpayer's filing status and is listed on each of the individual tax-return forms -- 1040, 1040A and 1040EZ. This deduction generally is taken by taxpayers who don't have many expenses.

For your 2007 return, it is $10,700 for married couples filing jointly and $5,350 for singles and married couples filing separately. It's $7,850 for heads of households.

For 2008, the standard deduction rises to $10,900 for married couples filing jointly and $5,450 for singles and married couples filing separately. It's $8,000 for heads of households.

• You can get the standard deductions and other tax adjustments for 2007 by clicking here. And, for 2008 tax adjustments, click here.

Itemized deductions are calculated from allowable expenses that a taxpayer tracks throughout the tax year. They are reported on Schedule A, with some amounts limited by a filer's income. While it takes more work, itemizing taxpayers often find the effort pays for itself through a lower tax bill.

Itemizing filers, however, are consistently in the minority. Critics of the tax code say this is because many people choose to forgo savings for simplicity. Using the standard deduction, regardless of the tax costs, means they can end their annual tax involvement sooner.

Millions of people overpay

How much taxpayers overpay is subject to regular studies. The study of 1998 data was instigated by then-House Majority Leader Dick Armey, R-Texas. In its study, the GAO initially found half a million taxpayers neglected to deduct mortgage interest.

In 2003, a second GAO exam of 1998 returns was expanded to unclaimed deductions for loan points, charitable contributions and other taxes, such as real estate, personal property and state and local income.

The final tally: As many as 2.2 million filers erroneously paid Uncle Sam too much, by an average of $438 per taxpayer. (The GAO has not updated the report since.)

Who ignored deductions and paid unnecessary taxes? The GAO says it was mainly lower-income and middle-income taxpayers. Taxpayers in the $25,000-to-$50,000 income range accounted for the bulk of those who paid too much; filers earning between $50,000 and $75,000 were a close second.

Taxpayer confusion and a nightmarish tax code

At the time, GAO director of tax issues James White said that his agency did not try to determine why filers claimed the standard deduction when itemizing could have saved them money. But critics say the problem is the increasingly complex tax code.

Confusion apparently isn't limited to rank-and-file taxpayers. The study estimated that professionals prepared almost half the 1998 returns on which taxes were overpaid because deductions weren't claimed.

Amended returns could pay off

Taxpayers who cheated themselves by taking the standard deduction, however, don't have to wait for legislation. They can use existing tax laws to recoup lost tax money.

If you discover you could have saved by itemizing deductions and are willing to tackle your taxes again, file an amended return on Form 1040X. It will let you negate your original standard deduction and list all the money-saving deductions you should have taken.

• Click here for instructions for Form 1040X.

Generally, tax returns must be amended within three years of the original filing deadline. If you wanted to amend your 2003 return, sorry. The deadline was April 17, 2007. (April 15 fell on a Saturday; holidays in New England and Washington, D.C., pushed the deadline back to two days.)

If you want to amend your 2004 return (which was due April 15, 2005), you have until April 15, 2008.

But if you also paid too much by not itemizing deductions on your 2003 or 2004 returns, get several copies of 1040X and get to work. To get your rightful dollar back money, you must file an amended return for each affected tax year.

Updated Dec. 7, 2007