Report to the Honorable Dick Armey,

Majority Leader, House of

Representatives

United States General Accounting Office

GAO

March 2002 TAX DEDUCTIONS

Further Estimates of

Taxpayers Who May

Have Overpaid

Federal Taxes by Not

Itemizing

GAO-02-509
Page 1 GAO-02-509 Tax Deductions

March 29, 2002

The Honorable Dick Armey

Majority Leader

House of Representatives

Dear Mr. Armey:

When computing their federal taxes, taxpayers either claim a standard

deduction or itemize deductions, and these deductions are subtracted

from adjusted gross income in determining taxable income. Taxpayers

generally claim the type of deduction that is larger, because this minimizes

their taxable income. In recent years, approximately 70 percent of

taxpayers have claimed the standard deduction, while the other 30 percent

have itemized.

This is our second report in response to your request for an estimate of the

number of taxpayers who may have overpaid their taxes by claiming the

standard deduction instead of itemizing their deductions, as well as of the

amount of taxes that they may have overpaid. In our first report,1

 we

estimated that on about 510,000 returns for tax year 1998, taxpayers who

claimed the standard deduction had deductible mortgage interest expense

in excess of their standard deduction and overpaid their taxes by about

$311 million.

In this report, our estimates include payments not only for mortgage

interest but also for mortgage points, state and local income taxes,

charitable contributions, and real estate and personal property tax for tax

year 1998. We developed our estimate for mortgage interest payments,

mortgage points, and state and local income taxes by matching a sample of

tax year 1998 returns for individuals who did not claim itemized

deductions with information in other Internal Revenue Service (IRS)

databases. This information was supplied by lending institutions and

employers and consisted, respectively, of the mortgage interest and points

paid by each taxpayer and the wages paid to each taxpayer. Our estimates

for charitable contributions and real estate and personal property taxes

 1

U.S. General Accounting Office, Tax Deductions: Estimates of Taxpayers Who May Have

Overpaid Federal Taxes by Not Itemizing, GAO-01-529 (Washington, D.C.: Apr. 12, 2001).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-509 Tax Deductions

are averages for various income classes based on Department of Labor

data. We assigned (imputed) these class averages to each taxpayer in the

same income class in our sample. In this report, we also present

information on the proportion of returns prepared by a third party on

which taxpayers may have overpaid their taxes.

When the data allowed, we identified and excluded from our sample the

most common situations, such as returns with no tax liability, on which

taxpayers could not have itemized deductions. We also attempted to

identify and exclude the most common instances in which a payment,

such as a mortgage interest payment, would not be deductible. However,

we could not exclude all nonitemizable payments. To the extent that our

estimates included some nonitemizable deductions, they may be

overstated. Likewise, data were not available for us to identify and include

all itemizable deductions. To the extent that we were not able to include

all the deductions that nonitemizers could have claimed, our estimates

may be understated. A more detailed discussion of our possible over- and

underestimates of deductible payments is contained in an appendix.

Because our estimates are based on a random sample of tax returns, they

are subject to sampling error, which indicates the extent to which random

samples are likely to differ from the populations that they represent. Our

estimates may also be subject to other types of error, called nonsampling

error, which can occur, for example, when we impute values for missing

data. Because we used imputed values for our estimates of charitable

contributions and of real estate and personal property tax payments, and

because these estimates may be affected by other sources of nonsampling

error, these estimates are likely to have larger nonsampling errors and may

be less reliable than our estimates of mortgage interest and state and local

tax payments. The appendix contains more detail on our methodology and

our assessment of the reliability of our estimates.

As agreed with your office, we did not attempt to determine the reasons

why taxpayers claimed the standard deduction when they might have paid

less tax had they itemized deductions.

We estimate that on about 948,000 tax returns for tax year 1998, taxpayers

did not itemize their deductions yet had payments for mortgage interest

and points and for state and local income tax that exceeded the standard

Results in Brief
Page 3 GAO-02-509 Tax Deductions

deduction for their tax filing status.2 When we impute charitable

contributions and real estate and personal property tax payments, the

estimate of the total number of taxpayers whose potential itemized

deductions exceeded the claimed standard deduction could be as high as

2.2 million tax returns.

We estimate that these taxpayers with unitemized mortgage interest,

mortgage points, and state and local income taxes that exceeded the

claimed standard deduction for their tax filing status are likely to have

overpaid their taxes by about $473 million. When charitable contributions

and real estate and personal property tax payments are included, the total

overpayment of taxes could be as high as about $945 million. On the basis

of this $945 million estimate, the average overpayment amount was an

estimated $438. About 76 percent of these taxpayers may have overpaid by

$500 or less, while the remaining 24 percent may have overpaid their taxes

by more than $500. We also estimate that a third party prepared about 50

percent of the tax returns on which taxes may have been overpaid.

The tax code allows taxpayers to subtract from gross income either a

standard deduction or certain itemized deductions. The standard

deduction is the sum of two components, the basic standard deduction

and the additional standard deduction for taxpayers who are aged 65 years

or older, blind, or both. Both the basic and additional standard deductions

vary in amount, depending on filing status.3

 Basic and additional standard

deduction amounts are set by Congress and are adjusted annually for

inflation using the Consumer Price Index.

Itemized deductions are specified personal and other expenses that

Congress has chosen to allow as deductions in arriving at taxable income.

Deductible personal expenses include certain of the taxpayer’s interest

 2

The five filing statuses are single, married filing jointly, qualified widow(er) with

dependent child, head of household, and married filing separately. The standard

deduction amounts vary by filing status. For tax year 1998, the basic standard deduction

was $4,250 for filing single, $7,100 for married filing jointly or as a qualified widow(er),

$6,250 for head of household, and $3,550 for married filing separately.

3

For example, the basic standard deduction for single filers was $4,250 in 1998 with an

additional standard deduction of $1,050 for filers who were aged 65 years or older, blind, or

both, for a potential total standard deduction of $6,350. The basic standard deduction for

married filing jointly was $7,100 with an additional standard deduction of $850 for each

spouse who was aged 65 or older, blind, or both, for a potential total standard deduction of

$10,500.

Background
Page 4 GAO-02-509 Tax Deductions

payments, such as mortgage interest and points, which are charges paid,

or treated as paid, by a borrower to obtain a home mortgage; certain

nonfederal taxes, such as state and local income taxes; gifts to charity; real

estate taxes and personal property taxes; medical and dental expenses;

and casualty and theft losses. Other deductible expenses include certain

payments related to the production or collection of income and expenses

related to the management of property held for the production of income.

Generally, a taxpayer is allowed to claim either itemized deductions or the

standard deduction, whichever is greater. To minimize their tax liability,

taxpayers can compare their total standard deduction (the sum of their

basic standard deduction and any additional standard deductions) with

their total itemized deductions. If their itemized deductions are less than

their standard deduction, taxpayers can compute taxable income using the

standard deduction. If their itemized deductions exceed the standard

deduction, taxpayers can compute taxable income by itemizing.

To estimate the number of taxpayers who may have overpaid their taxes

by claiming the standard deduction instead of itemizing, and to estimate

the amount of taxes that they may have overpaid, we used IRS’s Statistics

of Income (SOI) data for tax year 1998 (the most recent year for which

data were available). The SOI data consist of a random sample of about

164,000 individual returns that is statistically representative of the 124.8

million individual returns filed. We attempted to identify and exclude

taxpayers who could not have claimed itemized deductions, such as those

with no tax liability, from our estimate of potential overpayers.

We matched the sampled returns with data from IRS’s Information Returns

Master File, which contains data for mortgage interest and points from

form 1098 information returns that were received by IRS from taxpayers’

lending institutions. We used this matched file to obtain mortgage interest

payments and points for taxpayers in the SOI sample who did not itemize

their deductions. We attempted to identify and exclude from our estimate

of potentially deductible mortgage interest and points any of these

payments that could not be claimed as itemized deductions.

Our estimate for state and local income taxes was based on our analysis of

a subsample of the SOI sample returns for individuals who reported wage

income and did not claim itemized deductions. For these wage earners, we

collected the state and local income taxes reported on their form W-2 and

applied these values to the total SOI sample of returns on which taxpayers

reported wages but did not itemize their deductions.

Scope and

Methodology
Page 5 GAO-02-509 Tax Deductions

Our estimates for charitable contributions and real estate and personal

property taxes were based on the Department of Labor’s calendar year

1998 consumer expenditure survey (CES), which contains data on these

expenditures by income level and geographic location. For estimates of

the charitable contributions and the personal property taxes of

nonitemizers, we calculated the average value of these payments by

income class in the CES sample and imputed these class averages to each

nonitemizer in the same income class in the SOI sample. For estimates of

real estate taxes, we calculated the average payment by geographic

location as well as by income class and imputed this class average only to

nonitemizers in the SOI sample who also had mortgage interest payments.

All sample results in this report have been weighted to reflect the entire

population and are subject to sampling error. These sampling errors

reflect the extent to which random samples of these sizes and structures

are likely to differ from the populations that they represent. Each of the

estimates is surrounded by a 95 percent confidence interval, indicating

that we can be 95 percent confident that the interval contains the actual

population value.

In addition to sampling error, our estimates may also be affected by other

sources of error, such as errors in interpreting questions or providing

information on the CES, errors in processing or recording data, and errors

made when estimating missing data. These types of error are called

nonsampling error. The estimates of charitable contributions and of real

estate and personal property tax are likely to have larger nonsampling

errors than our other estimates, because, unlike the estimates of mortgage

interest and state and local tax payments, they are based on survey data

and require procedures for estimating missing values. Because of these

additional sources of nonsampling error, these estimates may be less

reliable than the estimates of mortgage interest and state and local income

tax payments by nonitemizers.

The appendix contains more detail on our findings and data limitations.

We did our work from July 2001 to March 2002 in accordance with

generally accepted government auditing standards.

We requested and received comments from IRS’ director of the Office of

Research, Analysis and Statistics of Income on a draft of this report. In

addition, we discussed our methodology with academic and other tax

policy experts. They stated that the methodology we used for developing

our estimates was reasonable.
Page 6 GAO-02-509 Tax Deductions

For tax year 1998, taxpayers filed more than 124 million tax returns. On

almost 86 million, or about 70 percent, of these returns, taxpayers claimed

the standard deduction. On the remaining 38 million, or about 30 percent,

taxpayers itemized their deductions. We estimate that on about 948,000 of

the returns claiming the standard deduction, taxpayers could have

reduced their taxes because of mortgage interest, mortgage points, and

state and local income tax payments that exceeded the standard

deduction. After imputing charitable contributions and real estate and

personal property tax payments to taxpayers, we estimate that the number

of returns on which payments for itemized deductions exceeded the

standard deduction could be as high as 2.2 million returns. These

estimates and their confidence intervals are reported in table 1.

Table 1: Estimated Number of Returns on Which Taxpayers May Have Overpaid Taxes because Itemizable Deductions May

Have Exceeded the Standard Deduction, and Estimates of Amounts Overpaid, Tax Year 1998 (numbers in thousands)

Return category

Estimated

returns

95% confidence

interval

Estimated

overpayments

95% confidence

interval

Returns on which mortgage interest and points and

state and local income tax exceeded the standard

deductiona

948 607–1,411 $473,048 367,964–578,133

Returns on which mortgage interest and points and

state and local income tax plus imputed charitable

contributions, real estate and personal property

taxes exceeded the standard deductionb

2,157 1,602–2,838 $945,182 792,542–1,097,822

a

Estimate based on SOI and sampled tax return data.

b

Estimate based on SOI and sampled tax return data as well as imputations from CES data.

Source: GAO analysis of SOI and other IRS data and Department of Labor CES data.

In addition, as shown in table 1, we estimated that taxpayers who could

have reduced their taxes by itemizing mortgage interest and points and

state and local income tax payments may have overpaid their 1998 taxes

by about $473 million. We estimated that if charitable contributions and

real estate and personal property tax payments are also imputed,

taxpayers may have overpaid taxes by as much as $945 million (or about

0.1 percent of all 1998 individual income tax paid). On the basis of this

$945 million estimate, the average estimated overpaid tax amount is $438.

As shown in table 2, on about 76 percent of returns, taxpayers may have

overpaid by $500 or less, while on the remaining 24 percent of returns,

taxpayers may have overpaid their taxes by more than $500.

Itemized Deductions

Exceeded the

Standard Deduction

for Some Taxpayers

Who Did Not Itemize
Page 7 GAO-02-509 Tax Deductions

Table 2: Distribution of Returns on Which Taxpayers May Have Overpaid Taxes

because Itemizable Deductions May Have Exceeded the Standard Deduction, Tax

Year 1998 (numbers in thousands)

Returns

Distribution of

overpaid tax

Estimated

number

Percentage

of total 95% confidence interval

$1–$100 677 31 358–1,070

$101–$250 591 27 310–950

$251–$500 382 18 264–525

$501–$1,000 275 13 185–387

$1,001–$5,000 224 10 147–322

>$5,000 80 3–20

Total 2,157 100 1,602–2,838

Note: Totals may not sum because of rounding.

Source: GAO analysis of SOI and other IRS data and Department of Labor CES data.

We also estimated the number of returns with overpayments that were

prepared by third parties. Most of these third-party preparers were paid

preparers; less than 1 percent of the returns were prepared by IRS and

other noncommercial preparers. On the basis of the data in table 3, we

estimate that for about 50 percent of the taxpayers who might have

overpaid their taxes, the tax returns were prepared by a third party.
Page 8 GAO-02-509 Tax Deductions

Table 3: Distribution of Returns Prepared by a Third Party on Which Taxpayers May

Have Overpaid Taxes because Itemizable Deductions May Have Exceeded the

Standard Deduction, Tax Year 1998 (numbers in thousands)

Distribution of

 overpaid tax

Estimated

returns

Estimated

returns

prepared by a

third party

95% confidence

interval

$1–$100 677 327 70–823

$101–$250 591 339 88–792

$251–$500 382 155 98–231

$501–$1,000 275 138 87–206

$1,001–$5,000 224 104 62–162

>$5,000 88 3–20

Total 2,157 1,071 701–1,442

Note: The confidence intervals for the estimated returns are shown in table 2. The upper ends of the

confidence intervals for estimated returns prepared by a third party can exceed estimated returns

because the latter also are estimates.

Source: GAO analysis of SOI and other IRS data and Department of Labor CES data.

As agreed with your office, we plan no further distribution of this report

until 30 days from the date of this letter, unless you publicly announce its

contents earlier. At that time, we will send copies to Representative

William Thomas, chairman, and Representative Charles B. Rangel, ranking

minority member, House Committee on Ways and Means; Senator Max

Baucus, chairman, and Senator Charles E. Grassley, ranking member,

Senate Finance Committee; Representative Amo Houghton, chairman, and

Representative William J. Coyne, ranking minority member, Subcommittee

on Oversight, House Committee on Ways and Means; and the Honorable

Charles O. Rossotti, commissioner of internal revenue. We will make

copies available to others on request.
Page 9 GAO-02-509 Tax Deductions

If you have any questions regarding this report, please contact me at (202)

512-9110 or Ralph Block at (415) 904-2150. The major contributors to this

report were John Mingus, Kevin Daly, and Anne Stevens.

Sincerely yours,

James R. White

Director, Tax Issues
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 10 GAO-02-509 Tax Deductions

Our estimates of the number of taxpayers who potentially overpaid their

federal taxes by claiming the standard deduction instead of itemizing and

of the amount of taxes they may have overpaid are based on estimates of

nonitemizing taxpayers’ payments for mortgage interest and points, state

and local income taxes, charitable contributions, and real estate and

personal property taxes for tax year 1998.1

 Data were not available for us

to identify and include all itemizable deductions. To the extent that we

were not able to include all the deductions that nonitemizers could have

claimed, our estimates may be understated.

To make these estimates, we used IRS’s Statistics of Income (SOI) data for

tax year 1998. Our estimate for mortgage interest and mortgage points was

based on SOI sample returns for individuals who did not claim itemized

deductions. For these returns, we obtained tax year 1998 data on mortgage

interest payments and points from IRS’s Information Returns Master File.

Our estimate for state and local income taxes was based on our analysis of

a subsample of SOI sample returns for individuals who reported wage

income and did not claim itemized deductions. For these wage earners, we

collected the state and local income taxes reported on their form W-2. Our

imputations of charitable contributions and real estate and personal

property taxes were based on 1998 consumer expenditure survey data for

the SOI sample of taxpayers who did not itemize their deductions. The

sample results in our report have been weighted to reflect the entire

population and are subject to sampling and other types of error.

In our report, we estimate federal income tax overpayments by taxpayers

who do not itemize. We do not include the effect on state tax liabilities of

itemizing at the federal level. For most states, itemizing on the federal tax

return has no effect on state tax liabilities. However, in two states—Rhode

Island and Vermont—where the state tax liability is a percentage of the

federal tax liability, taxpayers who overpaid by not itemizing at the federal

level would also overpay state taxes. In three states—Georgia, Virginia and

Utah—and the District of Columbia, where taxpayers who itemize on their

federal returns must also itemize on their state tax returns and not all

federal itemizable deductions are deductible, taxpayers who overpaid by

not itemizing at the federal level may have increased or decreased tax

liabilities at the state level. In these jurisdictions, the effect on state tax

 1

We selected these five itemizable payments for our estimates in part because, among those

who did itemize their deductions in tax year 1998, mortgage interest and deductible

mortgage points, taxes paid, and charitable contributions were the largest itemized

deductions, together accounting for 90 percent of all itemized deductions.

Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 11 GAO-02-509 Tax Deductions

liabilities of itemizing on the federal return depends on the size of the state

standard deduction, state tax rates, and the deductions allowed at the

state level.

We attempted to identify and exclude from our sample the most common

situations in which taxpayers could not have itemized their deductions.

Except as noted, these are the same exclusions as in our first report. We

excluded:

• Returns with no tax liability. Because these filers had no tax liability,

there was no potential gain to them in itemizing deductions.

• Returns where the filing status was “married filing separately.” Taxpayers

in this filing status are required to use the same type of deductions as their

spouse (i.e., if one spouse claimed the standard deduction, the other must

also). Some of these taxpayers may have been required to claim the

standard deduction because their spouse did so. We did not have data on

the filing status of the spouses, so we excluded these taxpayers from our

analysis. In addition, we would not have been able to allocate the itemized

deductions between the two returns.

• Returns of taxpayers that were in the phaseout range for itemizing

deductions and who would not have lowered their taxes by itemizing.

Certain itemized deductions are subject to being phased out, beginning at

certain levels of adjusted gross income. For tax year 1998, the income

levels are $124,500 for filing single, for married filing jointly, for qualified

widow(er) with dependent child, and for head of household; and $62,250

for married filing separately. The itemized deductions subject to phaseout

are home mortgage interest, including points; state and local income taxes;

gifts to charities; real estate and personal property taxes; unreimbursed

employee expenses; and some other itemizable expenses.

We excluded those taxpayers in the 1998 SOI sample who had claimed a

standard deduction at the time the sample was drawn but who later

itemized their deductions on an amended return. In our first report, we

simply excluded all taxpayers in the 1998 SOI sample who later filed an

amended return.

We matched data from IRS’s Information Returns Master File, which

contains form 1098 data on mortgage interest and points, provided to IRS

by mortgage lending institutions, to the SOI sampled returns to obtain

Exclusions from the

SOI Sample

Mortgage Interest

Payments
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 12 GAO-02-509 Tax Deductions

mortgage interest payment amounts for taxpayers in the sample who did

not itemize their deductions. We attempted to identify and exclude from

our sample the most common situations in which mortgage interest or

points could not be claimed as an itemized deduction. Again, except as

noted, these are the same exclusions as in our first report. We excluded:

• Returns on which taxpayers reported their entire mortgage interest, on

their Schedule C: Profit or Loss From Business; Schedule E: Supplemental

Income and Loss; or Schedule F: Profit or Loss From Farming; or on some

combination of Schedules C, E, and F. For those returns where the

mortgage interest on the forms 1098 exceeded the amounts reported on

the schedules C, E, and F, we assumed that the excess mortgage interest

could be personal expenses. In our first report, we simply excluded

returns with these types of business interest deductions and did not

attempt to estimate the personal mortgage interest of these taxpayers.

In certain cases, we were unable to exclude mortgage interest that may

not have been itemizable. To the extent that these cases included

nonitemizable mortgage interest payments, our estimates may be

overstated. Home mortgage interest payments that we identified as not

being fully itemizable but could not exclude from our estimates are as

follows:

• Interest payments on mortgage balances over $1 million when the

mortgage(s) was used to acquire (i.e., buy, build, or improve) the

residence(s). Although we could not exclude them, it is unlikely that our

sample included many such large mortgages. Less than one percent of the

returns that we projected to have overpaid taxes had associated mortgage

interest payments of $50,000 or more, which would be the interest

payment on a $1 million mortgage at an interest rate of 5 percent.

• Interest payments on home equity debt, where the mortgage totaled more

than the lesser of $100,000 or the fair market value of the home, reduced

by acquisition indebtedness.

• Interest payments on a third home. Taxpayers who meet this

nondeductible category generally would have to have three non-incomeproducing homes. If any of the three homes were used for business

purposes, including rental property, the mortgage interest payments would

have been reported on the taxpayers’ Schedule C, E, or F. If so, they were

already excluded from our sample.

Our estimates may be affected by the accuracy of the form 1098 data that

we used. We assumed that the data were accurate for both the amount of

the mortgage interest payments and the taxpayer that made the interest
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 13 GAO-02-509 Tax Deductions

payments. If there are any errors in the data, our estimates may be

overstated to the extent that the mortgage interest amounts may be

overstated. Conversely, our estimates may be understated to the extent

that the mortgage interest amounts may be understated. Also, if the forms

1098 include the names and social security numbers of any taxpayers not

legally entitled to claim a mortgage interest deduction, our estimates may

be overstated.

To estimate amounts of state and local income taxes, we obtained a

subsample of 900 tax returns in the SOI sample from IRS and reviewed the

form W-2s attached to the returns. We selected this subsample by

identifying nonitemizing taxpayers with wages who lived in states with a

state income tax. To ensure that our subsample was representative of the

taxpayers in the SOI sample with wages, we stratified the SOI sample into

categories based on the amount of wages and mortgage interest for a given

taxpayer. We assigned weights to each taxpayer in the subsample, so that

it could be used to project the number of nonitemizing taxpayers in the

population whose state and local income tax would have exceeded their

standard deduction. Our estimates of both the number of overpayers and

the taxes overpaid may be understated, because we are not able to identify

the state and local taxes paid by taxpayers that were not withheld from

their wages.

Our estimates for charitable contributions and real estate and personal

property taxes were based on our analysis of data from the Department of

Labor’s consumer expenditure survey (CES). The CES contains data on

the expenditures of consumer units (roughly equivalent to households) by

income level and geographic location that include charitable contributions

and payments of real estate and personal property taxes.2

 The CES data

that we used are from a random sample that represents all U.S. consumer

units in calendar year 1998.

To estimate charitable contributions for nonitemizers, we calculated the

average charitable contribution of households in the CES sample by

 2

The charitable contributions in the CES are contributions of cash, stocks, and bonds to

religious, educational, and other charitable organizations. To the extent that nonitemizers

made contributions of other types of property that are not included in the CES but that may

be deductible on tax returns, our method may understate the number of taxpayers who

overpaid their taxes.

State and Local

Income Taxes

Charitable

Contributions, Real

Estate, and Personal

Property Taxes
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 14 GAO-02-509 Tax Deductions

income class and imputed this class average to each nonitemizer in the

same income class in the SOI sample. A limitation of this “mean value

imputation” method is that it does not fully reflect the distribution of

charitable giving among all taxpayers. The method imputes some

contribution to all nonitemizers and imputes the same contribution to

each nonitemizer in an income class. According to the CES data, most

households in most income classes make no contributions or make

contributions that are less than the average contribution. To the extent

that nonitemizers did not make any charitable contribution or made

contributions that were less than the average, our method may overstate

the number of taxpayers who overpaid their taxes.3

 Also, to the extent that

nonitemizers made contributions greater than the average, the method

may understate the number of taxpayers who overpaid their taxes.

However, we believe that our estimates of charitable contributions are

likely to produce reasonably accurate estimates of overpaid taxes despite

this limitation. The average contribution does not exceed the standard

deduction for any filing status. (The contribution amounts range from $135

for those with less than $5,000 income to $1,348 for those with more than

$70,000 income.) Only when these imputed contributions are added to

other deductions can the total exceed the standard deduction. Our

analysis of itemizers shows that taxpayers with the deductions that we did

not impute, the mortgage interest and state and local tax payments, are

more likely to make some charitable contribution. Furthermore, the

amount of their contribution does not vary consistently with the amount of

these other deductions. To the extent that charitable contributions are

related to other deductions in the same way for nonitemizers, imputing the

same average contribution to each taxpayer is likely to produce a

reasonably accurate estimate of the effect on overpayment of taxes

resulting from this additional deduction.

For our real estate tax estimates, in addition to separating households in

the CES sample into income classes, we separated the households into

two classes depending on whether or not they lived in a metropolitan

 3

The CES data do not allow us to identify the charitable contributions made by

nonitemizers. In 1986, when taxpayers who did not itemize could fully deduct their

charitable contributions, about 45 percent of nonitemizers made some charitable

contribution, compared with about 63 percent of all taxpayers. The nonitemizers gave an

average of $474, while the average for all contributors was $1,036. To the extent that these

relative giving practices still applied in 1998, nonitemizers would be, like most households

in the CES, less likely to make contributions and more likely to contribute less than the

average amount.
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 15 GAO-02-509 Tax Deductions

statistical area. We calculated the average real estate tax for these

combined income and location classes and imputed this class average to

each nonitemizer in the same income and location class in the SOI sample

who also had paid mortgage interest. A limitation of this method is that, to

the extent that nonitemizers without mortgage interest owned real estate

and paid real estate taxes on this property, our estimates of both the

number of overpayers and the amount overpaid may be understated.

For estimates of personal property tax payments, we also used the CES

sample to calculate average personal property tax by income class and

imputed this class average to nonitemizers in the same income class in the

SOI sample. This method has the same limitations as the method for

estimating charitable contributions. However, for the reasons that we

described regarding charitable contributions, we believe that this method

produces reasonably accurate estimates of the effect of this additional

deduction on overpayment of taxes.

The estimates of charitable contributions and of personal and real estate

taxes are less reliable than the estimates of the other deductions, because

they are likely to have larger nonsampling errors. Unlike the mortgage

interest and the state and local income tax estimates, which are based on

tax return information, these estimates are based on the CES data and on a

procedure for imputing missing data to nonitemizers. Our use of survey

data and our imputation of missing data provide additional sources of

nonsampling error that are not present with the other estimates.

To assess the importance of nonsampling error from our use of survey

data, we reviewed studies of the reliability of the CES data. In the studies,

the CES estimates were judged more reliable to the extent that they agreed

with estimates from other sources. The CES estimates of property taxes

were found in general agreement with estimates from another source.

However, we found no study that compared CES estimates of charitable

contributions with estimates from other sources. The studies indicated

that the CES might underreport income, particularly at the lower end of

the income distribution. To the extent that this is true, imputations based

on the CES data may overstate the number of taxpayers in lower income

categories who overpaid their taxes.

To assess the importance of nonsampling error from our use of

imputations, we used an alternative method to impute missing data. As

described above, a limitation of the imputation method used in our report

is that in imputing the same average value by income class to all

nonitemizers, it does not reflect the fact that many households in the CES
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 16 GAO-02-509 Tax Deductions

reported making no charitable contributions or personal property tax

payments. To test the effect of this limitation on our estimates, we

randomly imputed zero values for charitable contributions and personal

property tax payments to nonitemizers in the same proportion by income

class as the proportion of households in the CES that reported making no

contributions or payments. We imputed to the remaining nonitemizers the

average charitable contribution and personal property tax payment of only

those households that reported making such contributions and payments.

We found that using this alternative imputation method had very little

effect on our estimates. The estimated number of returns with

overpayments increased by about 2 percent and the amount overpaid

increased by about 8 percent above the estimates in our report.

The net effect on overpayment of taxes of our imputed estimates of

charitable contributions and real estate and personal property taxes

depends on how these three deductions are related to the other itemizable

deductions that we estimated. The sum of the largest possible values for

each of these imputed estimates does not exceed the standard deduction

for any filing status. Only when these imputations are added to the other

deductions can the total exceed the standard deduction.

The components of our estimate of overpaid taxes are shown in table 4.

Beginning with the component of overpaid taxes for which our data are

most reliable—mortgage interest and points—we identified more than half

a million taxpayers whose estimated mortgage interest and points alone

exceeded their standard deduction. The addition of state and local income

tax withholding adds another approximately 430,000 taxpayers whose

estimated mortgage interest and points plus state and local income taxes

exceeded their standard deduction.

When imputed itemizable deductions are added to our estimated

deductions, another approximately 1,209,000 taxpayers are found to have

estimated mortgage interest and points, state and local income taxes,

charitable contributions, and real estate and personal property taxes that

exceeded their standard deduction.

Components of

Overpayment
Appendix: Methodology for Estimating the

Number of Returns on Which Taxpayers

Overpaid Taxes by Not Itemizing Deductions

Page 17 GAO-02-509 Tax Deductions

Table 4: Estimated Number of Returns on Which Taxpayers May Have Overpaid Taxes because Itemizable Deductions May

Have Exceeded the Standard Deduction, Tax Year 1998 (numbers in thousands)

Return category

Estimated number

of returns

Estimated

additional returns

Percentage

of total additional

returns

95% confidence

interval

Returns on which mortgage interest

and points exceeded the standard

deduction 518 518 24 440–611

Returns on which mortgage interest

and points and state and local income

tax exceeded the standard deduction 948 430 20 607–1,411

Returns on which mortgage interest

and points, state and local income tax,

and real estate tax exceeded the

standard deduction 1,319 371 17 964–1,760

Returns on which mortgage interest

and points, state and local income tax,

real estate tax, and charitable

contributions exceeded the standard

deduction 1,899 580 27 1,403–2,512

Returns on which mortgage interest

and points, state and local income tax,

real estate tax, charitable contributions,

and personal property tax exceeded

the standard deduction 2,157 258 12 1,602–2,838

Note: Totals may not sum because of rounding.

Source: GAO analysis of SOI and other IRS data and Department of Labor CES data.

(440053)
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