MONEY ON THE TABLE

Doing taxes is such a pain that Americans forgo billions in savings to just get it over with

The day in mid-April when taxes are due fills most Americans with dread. Filing US taxes is a pain, made even more painful if you itemize deductions—the process of compiling the spending exempt from taxes, like mortgage interest payments and charitable contributions, can be arduous and annoying.

Keeping track of these deductions is such an annoyance that, according to a recent study published by the National Bureau of Economic Research, many taxpayers forgo thousands of dollars to avoid doing it. The study tracks who chooses to itemize their deductions, and who doesn’t, to cleverly reveal why taxpayers are willing to leave so much money on the table when it comes time to file.

Last year, only about 30% of US taxpayers itemized deductions. The other 70% chose to take the standard deduction offered by the government of $6,350—a practice introduced so that middle-class taxpayers wouldn’t have to go through trouble of itemizing. Most of the people who took the standard deduction did so because, even if they added up all their deductions, they would amount to less than $6,350. But there are others who take the standard deduction but would gain from itemizing, explains UCLA economist Youssef Benzarti, the study’s author.

Benzarti knows this by examining historical data. He analyzed tax filings from 1980 to 2006, and found that there were never as many households with itemized deductions just above the standard deduction as you would expect. For example, in 2005, when the standard deduction was about $6,100 (in 2016 dollars), there were far more households who itemized amounts close to $12,000 than close to $7,000. This doesn’t make sense if all people who would gain from itemizing their deductions actually did so. Given what we know about the distribution of US incomes and expenditures, many more households would have around $7,000 to deduct instead of $12,000. Benzarti posits that many of these households just above the standard deduction threshold must have decided the gain of itemizing wasn’t worth the pain of going through the process. He also suggests that people who put off doing their taxes until the last minute tend to forgo more deductions than others.

Benzarti estimates that the typical household is willing to give up somewhere between $200 to $600 in order to avoid itemizing their deductions. Using those estimates, he calculates that the total cost of doing taxes in recent years was about 1.2% of US GDP, or more than $200 billion.

This could change. As part of the recent US tax reform package, the standard deduction for this year nearly doubled. The Tax Policy Center, a nonprofit think tank, estimates that this higher standard deduction will more than halve the number of households who choose to itemize. Although there is much to dislike about the tax cuts, this is something to cheer. This time next year, far less time and money will be wasted on preparing taxes.

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