Extreme Tax Deductions May Increase Chances of Being Audited



Posted: Sunday, March 15, 2009

by Ron Finkelstein
Tax Deductions

At the IRS, everything is about averages. The standard deduction is the average amount of deductions for your situation. Tax credits are all based on average costs and benefits of having a child or going to college or buying energy efficient appliances. But what you may not know is that the IRS uses averages to determine whom to audit.

The IRS database uses statistical analysis to determine what the average "deduction range" is for most taxpayers. This range is mainly based on income, although they may use other factors. If you claim more deductions than the average range for your income bracket, the IRS computers will flag your return. Don't be scared though. Many returns that fall outside the deduction ranges are never audited.

In 2005, the average taxpayer with an income of $15,000 to $30,000 claimed $6,515 in medical expenses, $2,783 in taxes, $7,293 in interest, and $1,916 in charity donations. In the income range of $30,001 to $50,000, the averages were $5,625 for medical expenses, $3,623 for taxes, $7,582 for interest payments, and $2,158 for donations. Those who earned between $50,001 and $100,000 claimed an average of $6,144 in medical expenses, $5,812 in taxes, $8,946 in interest, and $2,703 in donations.

The two highest brackets showed the same patterns, though of course the numbers were larger.  The $100,001 to $200,000 bracket had average deductions of $9,727 for medical expenses, $10,504 for taxes, $11,927 for interest payments, and $4,057 for charitable donations. Those earning $200,001 and over deducted an average of $30,952 for medical costs, $39,321 for taxes, $21,166 for interest payments, and $20,434 for donations.

Even if your deductions fall way outside these ranges, tax experts agree that you should claim them all. There is nothing wrong with having a large number of deductions – in fact, it probably shows that you are doing something right! The famous Judge Learned Hand once stated during the 1934 case Helvering v. Gregory that "there is nothing sinister in so arranging affairs as to keep taxes as low as possible," and "there is not even a patriotic duty to increase one's taxes."

Simply ensure that you have all the necessary evidence – receipts, statements, tax returns, and any other relevant documents – to prove that your deductions are justified in case your return is chosen for auditing. (This is a good idea even if your deductions are completely average – there's no telling when the taxman will come calling.)
 
Learn How to Deduct Mileage for Commuting and other hidden Tax Credits that can save you tons of money. Ron Finkelstein is NOT a Tax Attorney or an accountant. He is merely a small business owner who has paid a lot of money over the years to learn a whole lot about Taxes and Time Management. I hope you enjoyed learning how to maximize your qualification limits on tax deductions and credits
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